The current market spiral we are experiencing is being driven by a loss of confidence in our financial markets and our country’s leadership. Job losses lead to decreased consumer spending while tight credit markets and reduced consumer spending lead to reduced capital expenditures and layoffs by businesses. These are basically feeding off of each other at this time. Shares of quality companies are being sold in an attempt to try to sidestep further declines in value.
A Dose of Reality
Recently, we discussed the bottoming process that takes place during major market declines. The current market decline, and the events of this past week, continues to follow the historical blueprint as we are now testing the lows reached on November 20th, 2008. Finding support at these price levels, for a second time, is an important step for the stock markets to move forward. The media, in all its wisdom, is more so compelled to report to us how the stock markets have retraced their values back to 1997 levels.
Financial Planning Updates
President Bush signed into law The Worker, Retiree, and Employer Recovery Act of 2008 on December 23rd, 2008. The new law grants a temporary waiver of Required Minimum Distributions from retirement accounts for the 2009 year only. Clearly, this provides relief for those who need to take the minimum distributions and will give the equities in the investment accounts an opportunity to recover. Furthermore, if you were taking monthly withdrawals from your retirement accounts simply to satisfy your Required Minimum Distribution, it may be prudent to suspend those for this year to avoid unwanted income taxes. At this time, it is expected that Required Minimum Distributions will continue in 2010.
Great Investor Wisdom
“So, although this decline is different in many ways from other declines, it is also the same in the way it is moving through the cycle. We feel that each week that goes by more indicators are flipping to the argument that this oversold condition may begin to correct to the upside. And keep in mind that in the first 40 days of a new bull market, stocks typically regain a third of what they lost during the bear market.”
The Advisor - Fall 2008
Don’t Miss the Best Days
The stock markets continue to attempt to digest the daily barrage of new information stemming from the credit crisis, current economic reports, testimonies on Capitol Hill by economic experts, and the current political backdrop. As if that wasn’t enough, recent conversations with money managers we use indicate the untimely liquidation of large hedge funds has significantly added to the volatile trading we are seeing in the stock markets.
After one of the wildest weeks in the history of investing, we feel it is not necessary to try to re-hash the causes of the volatility. We do think it is necessary to reiterate that while the particular circumstances of financial crisis invariably differ, the outcomes tend to be fairly similar. In sharp market declines, bottoms usually are punctuated by panic selling. We think if this past week didn’t fit that description, it was very close. Federal, and in this case, world governments responded aggressively to the crisis. During this period, business’ and even banks fail in the process. This is a normal and healthy part of business. As illustrated in the graph below, stocks eventually reverse course and the economy and confidence improves.
What Should We Expect?
At the most volatile and fearful leg of an investment cycle, an investor is left with two choices: a.) Liquidate equity positions and move to interest bearing CD’s or money markets in an attempt to stop the bleeding, or b.) Look at your portfolio for diversification, and if adequate, maintain your position and wait until the panic recedes and attention turns back to market fundamentals.
Politics as Usual
Every time our Congressional leaders get a chance to show they can work together for the good of the country they find a way to screw it up. Yesterday, both parties failed to hold up their part of the vote for a package to ease the banking credit crunch. Between the biting partisan speech that Speaker Nancy Pelosi gave on the floor, and the childish republicans changing their votes in protest, our so-called leaders demonstrated again where their interests lie. Many are more concerned with their re-election. Of the 18 congressional incumbents that are in close races this November, only 3 voted for the proposal.