Quarterly commentary: First Quarter 2009
Hello aggregate and road building, owners and operators,
Please find our Jim Sanderson Group, Aggregate Industries Wealth Management market commentary for the first quarter, to the end of March 31, 2009.
It was a very disappointing start to 2009 for domestic and global stock markets. After trading within a range for several months, many world markets revisited their November 2008 lows. An avalanche of discouraging data throughout the first months of 2009 continued to trample investor confidence and fuel a hasty retreat from the markets.
Many markets reached new lows in the second week in March. The final weeks of the quarter did show some increasing valuations however despite a concerted March rally, the overall stock market returns during the first quarter of 2009 had the TSX down by 2.2%, the S&P 500 declining by 11.7% and the Dow Jones Industrial Average falling 13.3%. At their lowest points the TSX was down more than 20% and the Dow and S&P, more than 25%. Many of our asset class investments actually had better relative performance than their indexes in this quarter.
Ongoing market volatility throughout the quarter caused our core 60/40 (equity/bond) portfolio to generate a gross return representing a decline of 4.17% over the previous quarter.
Have we hit bottom? That is the question on everyone's mind.
The bottoming process ends when markets hit their lowest point and the market recovery can begin. Unfortunately no one will ring a bell when this happens. Have we seen the bottom already? Only time will tell and by the time we can read it in the news the recovery will be well on its way. Sometimes this means a quick, sustained recovery and other times (as it appeared at the end of the first quarter) it can mean tantalizing months of equity markets trading within a range and retesting lows before markets find the bottom.
As the quarter ended, the question remains unresolved.
Markets find their bottom when investors feel worry, doubt and concern, not optimism that things are getting better. And despite historical evidence that equity markets are more likely to rise and have above average returns over the next five to ten years after a weak period, fear causes many investors to stay clear of these potentially beneficial upswings.
Market recovery signals economic growth: Missing upswings can be expensive.
I thought it would be helpful for you to see that markets rebound in advance of the economy. The accompanying charts confirm that the S&P 500 rebounded significantly before the first quarter of positive economic growth (measured by Gross Domestic Product) following the 1980 and 1990-1991 recessions. The significant gaps of missed opportunity between market bottoms and the first positive GDP quarter in both recessions are compelling reasons to stay the course.
The nature of the beast.
I have spoken about how easily investors are seduced by the promise of quick and impressive returns - always from the next big idea. I am not critical of their actions as this is human nature. Sadly, human nature is usually what makes the difference between investment success and ruin. In investing tortoises tend to win far more often than hares over the turns of the market cycle (and, as we have recently been reminded, markets still do have cycles.) (Source: Bloomberg.) Within the aggregate and road building industries, diversification into asset classs investing during these periods of pessimism with provide excellent entry points for long term investment horizons. This provides a great opportunity to diversify your own asset base and build wealth outside of your business. It is also an excellent opportunity to seek out a second opinion on your current investment or transition plan.
Finding balance in cooking - and investing - is an art.
The golden 60/40 rule (invest 60% of your portfolio in stocks and 40% in bonds and other fixed-income instruments) lost much of its zestiness during the bull market of the 90s. Investors need to take the 60/40 recipe off the shelf again in the face of the recent global economic salmonella scourge. We continue to advocate this type of strategy and have been dusting it off for a while.
It is true that stocks have historically returned more than bonds and that having more in stocks than bonds makes good sense. But consider a portfolio of $100 invested from the end of 1925 to the end of 2000. The following results are based on over 20,000 business days captivating millions of individuals, investing (in degrees and at different times) on the future.
Assuming no taxes and full reinvestment of dividends over that time, if the portfolio was:
- Fully invested in stocks, it would have grown to $259,000
- Invested in a 60/40 mix, it would have risen to $76,000
Which strategy would you choose? (Hint: The volatility experienced during those 75 years may change your mind.)
- Annual stock returns ranged between a 54% rise to a decline of 43%
- On eight separate occasions, stock losses exceeded 10%
- The 60/40 mix ranged between a 40% gain to only a 9% decline.
Remember, that $259,000 was generated by an anonymous automation that paid no taxes, bought and held, and reinvested every dime of dividends. How many investors do you know who are capable of that level of discipline? It is the holding when the market is collapsing that takes the most courage. Following a process based on science, helps to keep you focused on the big picture and an ultimate successful investment experience.
"Predicting is very difficult, especially if it is about the future" (Danish Physicist and Nobel Prize winner Neils Bohr)
More thoughts on diversification
The truly diversified investor owns assets that do not move up and down in lock step. As Peter Bernstein (an economic consultant to institutional investors and corporations) notes, "A colleague once suggested you are never adequately diversified unless you have some holdings that make you uncomfortable." Foreign diversification can be fraught with uncertainty, as daily news headlines confirm. But for investors who understand risk and have a clear investment strategy, foreign investing can benefit a well-balanced portfolio. Emerging markets were the top performers by country in the first quarter of 2009. (Source: Seeking Alpha.)
Within our asset class portfolios, there is exposure to some of the emerging markets. Investing in these areas requires discipline and to follow certain requirements prior to any countries being added to the portfolios. Two of the currently acceptable countries are:
China - Shanghai A Shares Index Up 32.85% (CAF)
Taiwan - TSEC Taiwan 50 Index Up 17.06% (EWT)
Variations on a theme?
Many investors can easily confuse news stories about the recession written last week with those written exactly 25 years ago. I am not being whimsical, because my family and I are living through this recession like everyone else. I merely want to re-enforce the fact that bad news has a way of always sounding the same. And as with every recession that has come before us, this one too, will end.
Here is an excerpt from "Time" magazine. December 9th
Not for many years has a Christmas season begun with so many tidings of spreading discomfort and lack of joy about the U.S. economy…the nation is now also plunging deeper into a recession that seems sure to be the longest and could be the most severe since World War II.
The auto industry reeled from a new-model sales rate 35.8% below last November's already somewhat depressed pace. But the decline is no longer confined to autos and home building, which is down 33%... In classic fashion, the recession has begun to work its way through the entire economy…
That "Time" excerpt was dated December 9th…1974.
The bull market began three weeks later and was up 37% in 1975 and then gained 23.8% in 1976.
Here is one more excerpt from "Time" dated January 13th
The Recession; how bad is it? And what gives on Wall Street?
"Whining" hardly captures the extent of the gloom Americans feel as the current downturn enters its 18th month. The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years. Says University of Michigan economist Paul McCracken: "This is more than just a recession in the conventional sense. What has happened has put the fear of God into people."
That excerpt was published on January 13th…1992.
The recession had 'actually' ended nine months earlier, in March of 1991. The US stock market went on to grow by an average of 17.5% per year for the next decade!
Exactly one year ago, I said, "It's worth revisiting why we invest money as we do".
And, it's worth repeating today.
"I have said that volatility is part of investing and is to be expected. It need not unsettle an investor with a plan built on patience and common sense. We follow a plan that factors in volatility because we are well diversified, look to the long term and make our decisions based on quantitative, historical information.
We believe that markets work, risk and return are related, and diversification is critical. We target proven risk factors that provide higher expected returns. We believe that markets are efficient and over the long term make money for patient, focused investors. Diversification reduces risk through asset allocation."
Many wealth managers like myself have said that over time, a well-structured investment approach will create a higher reliability and confidence level than one based on instinct and prophesy. We need to factor in the element of surprise that often blindsides us when we are most relaxed.
We are here to provide you with global investment solutions that maximize returns - always within your risk comfort level.
If you are looking to lock in your diesel costs for the next 12 months please call us to see if this will work for you.
I wish you a safe and pleasant spring and summer. As always, please contact me if you have any questions or should you wish to schedule a no obligation second opinion or review of your portfolio.
Sincerely,
Jim Sanderson, BSc.(Hon), CFP
