  |
|
||||||||
|
About | Our Team | Services | Investment Strategy | Portfolio Strategy | Contact | Newsroom | |
|
||||||||
|
|
By Mat Johnson If there was any doubt as to whether the U.S. economy was flirting with or possibly already in recession, this past quarter's stock market performance seemed to cast its vote with a heavy hand. The major equity indices all fell markedly on concerns over falling housing prices, dislocations in the credit markets, record oil prices, the still weakening dollar, and how these factors would combine to impact the near term future of the U.S. economy. On top of all this, the U.S. is in an election year, creating an even greater level of uncertainty and unfortunately, the market loathes uncertainty. Going forward, improvement in the markets will unlikely be evident until current uncertainties subside, and in particular the concerns surrounding the prospect of a U.S. recession. With regards to the prospect for an economic recession, the debate continues as to whether the economy is on the verge of entering a recession, or has already entered one. Recent economic data points have tipped the consensus toward believing the economy may have recently entered a recession, though many others, like us, believe the recession likely started as far back as September or October of last year. However, we also feel that we are now far closer to the recession's conclusion than just now entering one. Recent economic reports indicate that companies have made much of the necessary adjustments to a period of slower growth. Importantly, these adjustments are frequently associated with the actual trough in economic activity. The key question for the future is how (and when) this will be reflected in the market. Given that the stock market is a discounting mechanism, this suggests that investors should be focused now more than ever on the turning point in the economy, and specifically on the trough and next period of expansion. In order to satisfactorily identify these turning points in the economy, it is imperative to understand what a recession is, particularly beyond the popular notion of two consecutive quarterly declines in real GDP since, in fact, no consensus has been reached as to when the U.S. economy "peaked." As you will hopefully see, our view also suggests that the U.S. economy is now closer to coming out of, rather than just entering into, a recessionary environment, implying that the equity market is more likely to be discounting an increase in economic activity rather than a decrease in the months ahead. Even discounting for less fear of the outlook getting worse would be an improvement over what has been experienced as of late. Recession Defined In order to appreciate the near-term outlook from our perspective, it is imperative to understand what constitutes a general decline in economic activity or an economic recession. The official definition of a recession, determined by the National Bureau of Economic Research (NBER), is identified as "...a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and trade." What this basically means is that a recession has to be a broad-based decline in economic activity; that it must be of significance and that it must be of a certain length, thus satisfying the criteria of depth, duration and dispersion. While distinguishing between the official and more common definition may seem like hairsplitting, it does better determine the timing of turning points in the economy and therefore, when equities come to discount a brighter outlook. The trick is being able to estimate in which month a recession began, without having to wait for it to become "official." Using the rule of thumb of two consecutive declines in GDP in particular isn't very instructive for investors, since it places the emphasis on after-the-fact knowledge. Unfortunately, the NBER's official announcement isn't that timely either. In recent economic downturns, the NBER has had a knack for announcing the official recession just as it ends. For example, in 1991, it was officially determined that the economy entered a recession in July 1990, although didn't make this announcement until April 1991 — a month after the recession ended. In 2001, the NBER determined that the recession began in March 2001, in November of that year, the same month that it ended. There is likely a good reason that the NBER's job is proving difficult — recent recessions have tended to be milder than in the past, making it difficult to reach the 'significant decline' threshold. The current recession, as with those in 1991 and 2001, do appear milder than the "average." This is not likely due to such things as fiscal or monetary stimulus, but rather due to how the economy's structure has changed. For example, the 'outsourcing' of the more volatile manufacturing employment sector, and companies' adoption of just-in-time inventory management, has mitigated the "depth" of the adjustments that companies have to undertake to realign their businesses when growth slows down. Improvements such as these have also been the drivers behind the persistent improvement in the shorter duration of recessions. And the Data Says... Using our key benchmarks of broader economic activity in the charts below, we estimate that the recession likely began in October of last year, suggesting that the recession is now in its sixth month, a month shy of the recent average of seven months. Given that we have already seen substantial adjustments by companies to the slower pace of economic growth, the trough in the economy may very well be occurring now. Historically, timing the equity market's advance during or after a recession has not produced a clear winning strategy, however, accumulating shares during the recession and just after it has ended, have each resulted in positive returns. So What Lies Ahead? If we assume that we are currently in a recession, the data so far indicates that it is one of the mildest, despite what is being touted in the media. This is not to dismiss that certain segments of the economy have experienced deep recessions of their own. It is clear that the real estate side of the economy, and particularly those industries related to the real estate sector-namely, banks, have been impacted greatly over the past year. But in a broad sense, the economy has not exhibited the broad-based, deep decline in economic activity, which is characteristic of past recessions. Nor do we expect it to in the months ahead. Recessive Recessions As can be seen below, the percentage of the time the U.S. economy has spent in recession has shrunk from one-third in the first half of the 20th century to just 7% of the time since 1982, reflecting vast improvement in how companies adjust to business cycle conditions. Moreover, if one believes that this current downturn follows any resemblance to recent historical patterns, that is, representing the 7% of the time in economic decline, then investors should gain a great deal of optimism looking forward should the remaining 93% of the time be spent expanding. Regardless of whether history provides any significant guide to the future or not, the point is, businesses have clearly proved capable of making more rapid adjustments during periods of contraction than in past recessions, while also sustaining growth over longer periods of time. If one has to forecast blindly into the future, we would suggest a bias toward the economy being back in the black sooner rather than later. In the months ahead we will be looking for signs that the economic pain is over. The tell-tale signs of this improvement will be less than obvious, as many economic data points lag broader economic upturns. Employment, for example, is likely to continue to weaken even as economic conditions improve. This will likely pit emotion against evidence in the months ahead, and likely result in somewhat choppy market conditions. However, with the equity market currently undervalued by more than 20%, even "choppy" indications of improvement should translate into higher equity prices in the months ahead. The current economic and market backdrop in front of us underscores our belief in gradualism in adjusting well diversified, multi-asset class portfolios to take advantage of prevailing market conditions. As asset classes become more or less attractive over time, we, as strategic-minded investors, will continue to make tactical shifts as opposed to attempt to time any perceived "bottoms."  Back to TopDo You Remember the 70's? By Scott Whittemore Jill Price does. She has the first diagnosed case of a memory condition called "hyperthymestic syndrome" — the continuous, automatic, autobiographical recall of every day of her life since she was fourteen. Give her any date from that year or later, and she can almost instantly tell you what day of the week it was, what she did that day, and any major world event or cultural happening that took place, as long as she heard about it that day. Jill must be feeling 70's déjà vu when she reads today's Business headlines: "Gold and Oil at All Time Highs", "Dollar at all time Low", "Is Stagflation Returning?" and "Trade Deficit Sets New Record." While I do not have the memory of Jill Price, as a teenager growing up in the 70's, today's headlines sound very familiar. However, for a generation born after 1980, the 70's are as distant and unimaginable as the 1930's depression was for my generation. If you are someone who does not remember the 70's and do not see the eerie parallels with today's economy, you can take heart that as bad as the credit crunch and tumbling home prices appear today, they are no where near the problems we had in the 70's. Inflation is 4.1% today. In 1979, it was 11.22%. Unemployment is 4.8% as of February 2008. In 1979, unemployment was 5.8% and rising to 7.1% in 1980. On January 11, 1973, the Dow closed at 1052. On January 11, 1982, the Dow closed at 1084. The Seventies were a flat decade for stocks. January 11, 1973 was a special date for the Dow. It was an all time high. After a sharp fall in 1973 and 1974, it took nearly ten years to get back to that level. One of the lessons we can take from the 70's headlines, is although economic activity does go through cycles, we can make it through difficult economic times and come out of it for the better. The ten years after 1983 were great. On January 11, 1993, the Dow closed at 3,263. On January 10, 2003, it closed at 8,785. If you had let the pessimism that prevailed in the late 70's keep you out the stock market, you would have missed one of the best decades in the stock market history in the 1980's. Time, not timing is what matters most. Few investors — including professionals — can accurately forecast the market highs and lows. By consistently applying investment discipline, you can take advantage of buying opportunities when markets are vulnerable and enjoy growth when markets are robust. Difficult markets can be daunting for any investor. Too often, they undermine the best-laid plans by sapping confidence and detracting attention from the real goal of achieving long-term financial growth. Even if you are one year away from retirement, you probably still have 25 or more years to live in retirement. You still need to think long-term and keep your eye on your objective. Try not to overreact to transitory market fluctuations or let them sway you from your long-term financial objectives. Avoid being caught up in the cycles of euphoria and fear that sweep through markets periodically. At Quantum, we are focused on the client's objective. We are often asked what to do in today's market. Our answer is to stay focused on your objective. Be thankful that you do not have Jill Price's memory. So much of what she must remember is noise that can keep her distracted from focusing and experiencing what really matters. Just remember the headlines you are seeing today are noise as well. Being influenced by them may prevent you from achieving your true objectives. Back to TopIdentity Theft Insurance From the Insurance Information Institute By Scott Whittemore A recent Federal Trade Commission (FTC) study found that 8.3 million Americans were the victims of identity theft in 2005, and the number is rising. In approximately half of the incidents, thieves obtained goods or services worth $500 or less; however in 10 percent of cases, thieves got at least $6,000 worth of goods or services. Maybe even worse than the actual dollars losses, is the huge hassle involved in correcting the damage. Victims are often left with lower credit scores and spend months or even years getting credit records corrected. They frequently have difficulty getting credit, obtaining loans and even finding employment. Identity theft can be covered by insurance. Some companies include coverage for identity theft as part of their homeowner's insurance policy; others sell it as either a stand-alone policy or as an endorsement to a homeowners or renters insurance policy. The coverage provides reimbursement to crime victims for the cost of restoring their identity and repairing credit reports, including expenses such as phone bills, lost wages, notary and certified mailing costs, and sometimes attorney fees (with the prior consent of the insurer). Some companies also offer resolution services to guide you through the process of recovering your identity. For information on insurance companies that offer identity theft insurance, please give Scott Whittemore a call at (415) 927-8430. Tips for Avoiding Identity Theft
Additional Resources:
Back to TopStaying the Course By Stephen Bradley, Jr. & Adam Breech Volatile markets, especially like the bear market that we are witnessing, raise the issue of market timing. In hindsight, timing is simple; instead of being invested people should have liquidated their accounts. In the early 2000's, instead of taking the 40% decline, investors could have liquidated and taken a smaller hit in taxes. However, the question of when to get out and then, when to get back in are more opaque when looking forward. There is a simpler solution than liquidation and re-entry. Investors should stay the course and invest for the long term. Investing is not about market timing, that is called trading, and some traders do this on a daily basis. The two main drawbacks to this strategy are; short-term gains are taxed at about twice the rate of long-term gains, depending on your tax bracket. Any money made in daily trading is taxed at ordinary income levels. Second, the average market timing mutual fund investor, according to the Bureau of Labor Statistics, made -2% per year from 1987-2006, while the S&P was up 12% per year in the same period. Investing takes a completely different approach. Investing relies upon the ability of the investor to make long-term decisions. This is an easy concept to demonstrate when looking at real estate markets, especially with housing markets. Housing prices have been slipping significantly in the past year, but everyone is not liquidating their housing assets to secure their gain. Granted, it is much more difficult and costly to sell a house than it is to sell 100 shares of IBM, but it is the same general principal. People have faith that their long-term investment in their house will pay off, but that same faith is not held when it comes to the equity markets. We put forth the idea that an investor's assets should be treated the same way as their house. When markets go down, investors must realize that this is a short-term trend, and that the markets will recover and rebound. Over the history of the S&P 500, there are numerous down years, but there has never been a ten year period where an investor, if they stayed in a disciplined investment strategy, did not make money.1 Disciplined here meaning the investor benchmarked himself to an index (S&P 500), and matched the sector weights and styles of the index. There is the counter arguement that if you dodged the downside by liquidating, you can still ride the upside. The problem is that markets move fast, because they are highly liquid. If you miss the upswing too, then you are where you started, but you had to pay taxes on your gains, and you had transactions costs. Instead, with a fitting asset allocation and good discipline (which is really hard to come by for those of us who went through the early 2000's and felt that decline), equity markets will pay off. The other good news is that historically, equities have been a better hedge against inflation than most other instruments, even gold. This means that the average rate of return is substantially higher than the average rate of inflation. Real Estate has also historically been a good inflation hedge, but there are severe carrying costs to owning a house or rental property (upkeep and maintenance, transactions costs, property tax, etc.). Gold was at about $175 an ounce in 1975, and is now trading around $1000 an ounce today. That is an annualized return of about 5.5%. The Dow Jones Industrial Average has returned closer to 10% a year in that period. A professional investment manager's job is to be disciplined. We make sure that you remain fully invested. We have a consistent approach, and over time this approach takes advantage of equity markets' long term upwards trends. A professional investment manager's other job is to create the right asset allocation for the client. One that reflects each investors risk profile, and keeps them diversified, so that even in the bad years the risk of loss is minimized. The real key to investing is discipline, and staying the course. Markets may be volatile today, but tomorrow is hard to forecast. There is no guarantee of performance in the next ten years, but if history is any lesson, there is a high probability that it will do well. 1. For the index performance of the S&P 500, ten-year rolling periods have had differing gains, but none of the totals have been negative over a ten year period. |
|
|
||||||||||||||||
|
||
|
Home | About | Our Team | Services | Investment Strategies | Portfolio Strategies | Contact | Newsroom © 2008 Quantum Capital Management. All Rights Reserved. |
|
|
||
|
||