Strategist’s Corner – Three years ago – Lessons learned since the market bottom

14Mar12

We usually mark births, wedding anniversaries, and promotions at work with celebrations. But should we even mark or mention the anniversary of the March 2009 low in the US stock market? I say yes, and here’s why.

Lots of lessons can be learned from the past, but those lessons don’t dictate where we are going next. The shadow of that knowledge will help us overcome the easy mistakes.

On March 9, 2009, we now know, the market hit a cycle low.

No one knows when a low has been reached until well after the event. But that day in March 2009, we witnessed a lot of selling. Lots of stocks were sold out of retirement accounts and small personal stock holdings. Some people could not stand the pain; the markets had lost between 30% and 50%. They panicked about additional losses, about their retirement accounts, and about whether their wealth would be wiped out.

A major network carried pictures of soup lines and Oklahoma dust bowls that week. The images hearkened back to the Great Depression as if to suggest that March 9, 2009 was ushering in another depression. But the analogy was an emotional one. The business cycle in March of 2009 was already reversing; the banks had been rescued by the government; and lower prices of goods and services, combined with low interest rates, were already setting the stage for a cyclical recovery in the United States.

But, it seems to me, something has been skewing these measures. Maybe the market has not acted in accordance with historical patterns because the mountains of debt in the United States, Europe, and Asia are damping demand. Perhaps investors are fearful that this debt will eventually threaten economic growth and as a result hurt corporate earnings. Fears of a banking crisis in Europe have also held markets back.

Conclusions

Lesson 1: Don’t let emotions rule when the facts might suggest another set of choices. Those who dumped stocks that week would miss out on a 100% rise in the market, with fits and starts, over the next three years.

Lesson 2: Don’t underestimate the US Federal Reserve Board. The decline of the Standard & Poor’s 500 Stock Index to 667 that week in 2009 was a harrowing and nail-biting experience for anyone. Investment companies were on the brink of breakeven, and hedge funds, the darlings of the early part of the millennium, started to crack and close down. But meanwhile, money was being placed into the banking system, a “run on the bank” was avoided, and the wheels of finance began to turn after a big scare.

Lesson 3: Don’t buy into “catastrophic” thinking. March of 2009 saw the heyday of the “I told you so” mentality. Some feared that the catastrophe had not yet begun.

Whatever the excess is, someone will always be there to say that the end result will be ruin for everyone. These people get attention, probably some fame, and maybe some money.

Back when I began in this business, a friend gave me the book The Coming Depression. I am sure the author made a bit of money on that book, which described a depression caused by inflation that would hit in 1974. If I had taken the book seriously, I would never have entered this business.

Lesson 4: You will never get the top right and get out, and you will never get the March 9 bottom right and get in. But, over time, it’s better to 1) use fundamentals, 2) gauge the facts of the business cycle, 3) understand the role of banks and money in a system like that of the United States, and 4) use valuations to gauge the danger of a bubble or bargain sale. Investors should use all these tools over a period of years, not pick just one asset class, or one stock, or one moment to sell or buy all.

In the three years since March 2009, when the world seemed as if it was ending, the markets here in the United States have risen about 100%, and the markets in some other countries have gained even more than that. Economies have expanded; new lessons have been learned.

Don’t succumb to overblown predictions, either ones that are too rosy or ones that are too pessimistic. There are few problems in the markets that have not been fixed. But most of all, take the emotions out of it. Consider asset allocation and believe in true fundamentals based on facts. You will go through storms, but you will also experience the new high and dry ground of recoveries, such as that of March 2012, when the world does not look so bleak.

No investment strategy, including asset allocation or diversification, can guarantee a profit or protect against a loss. No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

Source: By James Swanson, DFA, MFS Chief Investment Strategist, March 12, 2012w

Learn more about Ron Sloy.

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