Dear Investor,
As the stock market experiences yet another dramatic downward swing this week, it’s becoming increasingly apparent that what the financial markets face is not a lack of solid fundamentals or weak asset class performance, but a crisis of confidence.
To paraphrase President Franklin D. Roosevelt, “we have nothing to fear in the financial markets, but fear in the financial markets itself.”
Yes, the stock market has taken a drubbing – it’s the worst in decades. And yes, the investment portfolio values have slid sharply over the past few weeks. But the time-honored formula for dealing with severe bear markets – accurately measuring risk and emphasizing the purchase of cheap assets – has been turned upside down in a collective flight to safety by understandably nervous investors. Amidst the carnage and amidst the fear, we as a nation of free market capitalists have seemingly lost our financial compass.
The good news? The same investment tenets that brought unprecedented wealth to U.S. investors – buy good bargains and adopt a long term mindset to portfolio growth – are the same ones that will eventually lead us out of this mess and back on the road to prosperity.
While I hope you take my word for it, consider the wisdom of Warren Buffett, who in a recent interview with CNBC a few weeks ago emphasized the very same investment tenets, even as the Sage of Omaha fully recognized the seriousness of our economic problems.
“You know, five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary (stock market) buys. That doesn’t mean it won’t get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.“
At WrapManager, we agree. Eventually, the stock market will hit bottom and buyers will get back in. We believe that investors have been ignoring such good news items as earnings from IBM and General Electric, interest rate cuts, a steep decline in the price of oil, global government intervention, both at home and abroad, and an illogical penchant by investors of selling no matter what the underlying financial fundamentals look like.
Fundamentals will overtake fear – and when that happens the economy and the financial markets can truly begin to recover.
Facts on the Fundamentals
In the mean time, how bad is our current situation compared with previous financial crises? It’s not pretty right now, but it’s also not as bad as you might think.
In fact, when you examine the fundamentals there is ample reason for optimism over the long haul. Let’s look at some of the key themes impacting the current financial crisis, and see why there is room for hope.
Banking – Remember the early 1990’s and the savings and loan crisis? What you may not remember, besides all of the negative headlines, is that many people believed that Uncle Sam would take a financial bath by taking on problematic S&L assets. But guess what? The government wound up selling our stakes in banks for much more than even the experts imagined. That could also be the case today. In addition, many regional banks are actually in good financial shape – which certainly wasn’t the case in the 1930’s when an influx of locally owned banks failed, leading to deeper economic problems at the time.
Stock market bubbles – Traditionally, when stock market bubbles burst, the stock market invariably winds up stronger in the long run. While we have to be aware of ‘sucker rallies” and that a real recovery will take some time, the primary factor that fuels market growth – business productivity, which leads to rising corporate profits – is historically correlated with bull markets. That’s especially true in high-quality blue-chip sectors like consumer goods, energy and utilities, and health care. Such stable sectors are also good options in riding out rough financial markets.
Housing – The housing sector has seemed to recede in the public consciousness, due primarily to the alarming drop in stock market values in recent weeks. But most economists believe that the current economic crisis began with a housing bubble and will end when housing prices stabilizes – a trend, some economists point out, that should take place in late 2009 or 2010. We are, after all, building one million homes annually. Eventually people will buy them, especially as home prices become more affordable.
Economic History (Past is Prologue) – Most importantly, when push comes to shove, history is on the side of a market recovery. With powerful tools in our arsenal from the federal government, the Federal Reserve, and our always-resilient private sector, we can cure the economic ills that currently ail us. Right now, we’re taking our medicine and we have to wait for it to work.
It’s also worth noting that the stock market collapse we have seen this week was not preceded by a stock market boom. True, there was a boom in housing and credit but the stock market hasn’t really outperformed in the last decade. Consequently, as the stock market wasn’t actually overpriced it is something of a stretch to call what we seeing right now a “correction” to a more reasonable valuation. On the contrary, it is simply panic selling, pure and simple. While it’s folly to try and predict market bottoms, we have to ask ourselves why we are selling. In other words, are we selling because of fundamentals (i.e. because prices are good) or are we selling because others are selling – the classic herd mentality? If it is the latter, take a lesson from Warren Buffett…buy cheap stocks and hold them for the long haul.
Remember, the markets “correct” in both directions.
It’s also helpful to take the time to diversify your holdings. Studies show that, especially in times of market volatility, spreading your portfolio risk around can help bullet-proof your portfolio. As Sir John Templeton once said, “The only investors who should not diversify are the ones who are right 100% of the time.”
WrapManager is Here to Help
Past a refocus on fundamentals and a drive toward diversity, what can investors do? We believe that time, experience and knowledge are the way back to good economic health. At WrapManager, we have experienced and talented money managers managing your investments. As always, we’ll take concrete steps to customize your portfolio to your specific risk and objectives, especially tailored to what’s happening in the financial sector these days.
Feel free to tap into that investment expertise and give us a call – even if it’s just to talk. We recognize that times are tough, and that in times of great market uncertainty you have questions.
At WrapManager, we’re here to answer those questions and help you through these uncertain times.
In your interest,
Gabriel F. Burczyk, CEO
WrapManager, Inc.
Toll Free: (800) 541-7774
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