February 2009 Market Review
Posted by Larry Doyle on February 28, 2009 10:13 AM |
Prior to going to the comments section of my son’s report card, human nature dictates that I first look at the grades. In that same vein, let’s see how the markets performed for the month of February:
Let’s review my specific projections from the January 2009 Recap:
For those who track the markets, there is a 75-80% correlation in the annual moves in equity markets with the performance in January. Without parsing words, this performance in January portends a very challenging year for our equity markets. All eyes and ears remain focused on Washington for a comprehensive financial rescue package (Bank Transition, insurance for other assets, aid to stem foreclosures, et al). Trade the range for now with a very wide band. Buy the S&P as it approaches 750 and sell it as it moves above 900. Otherwise….be patient!!
In the bond space, I did believe and continue to believe that despite the Fed and Treasury promoting the concept of quantitative easing (using the Fed’s balance sheet to buy Treasury, agency, and mortgage related assets), these rates will work their way higher simply due to the MASSIVE financing needs of our government and global governments.
The corporate bond space, led by high yield bonds, had very solid returns this month. As we mentioned, we thought these sectors had already priced in the economic turmoil to a much greater extent than the stock markets. High yield bonds were up almost 10% on the month. I would not add to that sector after that performance.
The dollar inched lower versus the Japanese yen. I believe the dollar will continue to weaken versus the yen, as well as the Canadian dollar. The U.S. dollar dramatically outperformed the Euro and the British pound. The economic situation in Europe is just as bad, if not worse, than in U.S. In fact, a number of European countries are being seriosuly challenged to raise funds. Sovereign credit risks (the risk that a government defaults) have risen considerably.
In the world of commodities, gold outperformed due to the global government credit risk, the threat of longer term inflation, and weakness in currencies. Oil remains very volatile but ended the month down 2.5%. Metals remain weak with anemic demand.
Add it all up and what is one to do? In my estimation, an investor is being paid to WAIT before making any major capital commitments. For those who are significantly underweighted stocks, a dollar cost averaging (add a fixed dollar amount on a regular basis versus one lump sum at one point in time) approach is always recommended. I am not going out on a limb to say that we will retest the lows (down another 7-9%) seen on November 20th.
Well, we have retested those November 20th lows and on the last two days of the month took them out by 2-3%. We are now down anywhere from 12-19% across the board for most stock indices on a year to date basis.
In a normal market environment, if stocks gave ground by 2-4%, one would expect government bonds to rally in a “flight to quality” move. The fact that equities are down 11% for the month and government rates have moved HIGHER is a clear indication that the overwhelming supply of government bonds to finance our deficit will continue to be a major issue going forward. The market absorbed well more than $150 billion in government supply (bills to 30 year bonds) this month. In the face of that, it is no surprise that rates moved higher. The question for investors is where does one go.
The enormous government supply along with the weakness in stocks did put a dent in the credit sensitive sectors of the bond market this month. The “crowding out” effect (government financing needs crowd out the availability of capital to flow to private enterprise) will continue to be a major problem.
In very volatile trading, the U.S. dollar did improve primarily versus the Japanese yen while only marginally versus the Euro (although it is significantly stronger vs the Euro on a year to date basis). As I mentioned to a reader, the yen seems to have weakned as many hedge funds have finished unwinding trades in which they had borrowed the yen. I missed this call and thus I was clearly wrong that the dollar would still weaken vs the yen.
Gold is up solidly on the year but actually had gotten higher than $1,000/oz during the month. I do not invest in gold simply due to a highly speculative contingent that plays in this commodity. I think many funds and managers have purchased this commodity as a safe haven move but are willing to sell those positions out for short term profits.
The BIG question is where do we go from here. Should I buy stocks here? Should I sell? Should I hold? Obviously, those are questions that can only be answered based on one’s personal situation. All I can offer is my assessment of the markets, the economy, Washington, Wall Street and hope it helps you navigate your own financial and economic landscape.
While the markets have retraced back to those November 20th lows and even moved lower by 2-3%, I still can not make a case for buying the market. Why? Very simply because overall market valuations do NOT clearly and distinctly display themselves as cheap. You may ask how is it that markets that are now down 50+% are not cheap. Remember that stock prices are a measure of forward earnings and the multiple paid for those earnings. A fair multiple is typically between 12-18% but in bear markets that multiple can get decidedly cheaper than 12. Let’s take a multiple of 15 times. At yesterday’s close of 735, that equates to an earnings projection on the S&P 500 of $49/share. That is overly optimistic and hopeful and thus the risk remains too high relative to the reward.
I always traded and invested based on the premise that “hope is a lousy hedge” meaning that one needs to fully review the risks prior to investing and not “close your eyes, buy in because it is down a lot, and HOPE it works.” I do think we are approaching a stage where the market may still move lower but then start more of a sideways price action. Why? Very simply because the volumes are declining on a lot of exchanges which indicate the selling pressure is abating. That said, I think investors are in NO rush to buy.
I actually have somewhat greater concerns about bonds than stocks. Why? I think a lot of investors have rushed into the bond market, that supply of bonds will increase not only in the government space but also the municipal space as towns, cities and states deal with their budgetary problems. Corporate bonds were very cheap relative to stocks coming into the year but have dramatically outperformed in the first two months. Given that a lot of investors in the corporate bond space are newer investors (looking for a place to park money), I think bonds across all sectors may start to weaken from here.
The U.S. dollar is benefitting from a flight to quality move given the major political and social issues elsewhere in the world. Additionally, as the U.S. government has shown it will not allow major banks to fail (although the banks’ shareholders can and will be diluted), a lot of money has flowed into the dollar. I think the Canadian dollar and Australian currency are fundamentally stronger than the U.S. dollar at this point.
In regard to Washington and its impact on the economy and markets, it strikes me that the Obama administration is hellbent on implementing as much of its social program and liberal agenda as quickly as possible. The markets are sending a very clear signal that his agenda is not pro-growth, investor friendly, or fiscally sound. He’s the President and the electorate sent the Republicans home, so we need to let our democratic process work. That said, the markets do not and will not stand idly by “HOPING” things work out.
I do firmly believe we will work our way through these economic challenges, but it will be a longer and harder road than most market analysts and political pundits would promote. Maintaining hope is a critically important part of our country and our moral fiber. I am ALWAYS hopeful, but I am not blindly hopeful. That would be called willful neglect.
One thing I truly hope is that you find Sense on Cents helps you to navigate the economic landscape and that you will share this site with your friends.