Down for the Year
The last 14 months have been all about economic recovery and the tremendous gains seen in the stock market. Yet this afternoon we are down 3% on the year after a 4% decline this afternoon. Just two weeks ago, the day before the “flash crash of 2010” we were up 5%, and saw a high for the year on April 23 (up 10% for the year).
So what gives? Once again, volatility reigns. Interestingly, on the day of the flash crash the S&P500 reached a low point of 1065, just 1% away from where we stand today. While the market mechanisms on the day clearly failed with some stocks trading at a penny, the overall level was not a mistake. This is where the market was headed, and the panic of electronic trading run amuck was just a diversion.
I don’t have any remarkable insight into the market volatility over the past two weeks, other than to reiterate our view that the equity markets were far too complacent. Despite a balance of news this week, some good and some bad, nothing was going to keep equities from falling. In many ways, this is a sentimental sell-off after another short-term bubble.
How are things different from the collapse of 2008?
- Companies are already trading at low stock prices to their absolute highs. GE is trading at 1/3rd of its peak. Citigroup is 1/10th of their peak. Both have dramatically cut or eliminated dividends.
- Companies have finished cutting jobs. Manufacturing has stabilized, people have cut back on their spending and debt levels are going down in the US (I don’t think we can say the same about Europe, however).
- Other asset classes are reacting well. Government bonds are up. Corporate bond spreads have widened, but not significantly. Gold is stable, yet oil has shown some declines. Municipal bonds are up and utility stocks are flat.
There is clearly a set of economic unknowns around Europe and their debt levels, which could impact the US. That has got to be worked out over time with the corresponding impact known later. In a worst case scenario, the EU may have to drop the single currency. More likely, some of the EU “states” will have to rework their sovereign debt with a corresponding impact on the debt holders. But as far as we can see today, we are not revisiting the Armageddon scenario of 2008.
From an investments perspective, anyone who’s spoken to me in the last year has heard one mantra from me: bonds. This is why we use them, for their stability in these scenarios. We have maintained a highly underweight equity exposure, and been hording cash for the past two months. There will be a time to buy. Until then, it is wait and learn.
Regards,
David B. Matias, CPA
Leave a Reply
Want to join the discussion?Feel free to contribute!