Bear Market Wisdom

Dear Valued Client,

Despite the stock market’s huge gain during the last week of October, the stock market recorded its worst monthly showing in 21 years. The S&P 500 Index plunged 16.8 percent in October, its worst month since October 1987, when the market crashed 21.8 percent. Meanwhile, the NYSE Composite Index plummeted 19.5 percent, the NASDAQ fell 17.7 percent and the Dow Jones Industrial Average Index dropped 14.1 percent for the month.

The market's drop in October triggered a mass exodus from stocks. According to TrimTabs Investment Research, withdrawals from equity mutual funds rose to $9.2 billion in the week ending October 31, 2008, which was a $6.5 billion increase from the previous week. Three weeks earlier, in the week ending October 10, 2008, investors set an all-time record by pulling out $43.3 billion from equity mutual funds in a single week. This came on top of a record monthly redemption amount for September.

Combine these facts with sentiment indicators, such as the CBOE Volatility Index®, which was at or near 21-year highs for the majority of October, and the weekly Investors Intelligence survey of newsletter writers, which was at or near historically bearish levels, and it becomes clear that many investors are not interested in equities right now.

Despite all of the above pessimism, on October 28, 2008, investors went on a buying spree with the S&P 500 Index notching its second-biggest single-day gain in history. This rally was sparked by a half-point interest rate cut by the Federal Reserve and the loosening of other key lending rates. It is impossible to know if this one-day rally will lead to bigger and better weeks and months for the market. While all bull markets start with a short-term rally, not every rally triggers a bull market.

Although past performance is not indicative of future results, if we analyze typical market bottoms, like after the crash of 1987 or the technology bubble-burst of 2000 to 2002, the market started rebounding at the very time when economic and market conditions seemed the absolute worst. Media headlines screamed about doom and gloom, the death of equities or the second coming of the Great Depression. When the last of the sellers and skeptics dumped the last of their stock holdings, the way was cleared for a new wave of cautious buyers to start pushing stocks higher. This began the next bull market run. It didn’t start with a bang or with bells and whistles, but instead with upward price movements in the face of negative news and paralyzed investors.

Just like you, we are also investors, and we are keeping a close eye on markets and economic developments. Most importantly, we want you to know that our investment philosophy is intact. We are committed to you and to managing your investment program with the sound, time-proven discipline of asset allocation. Long-term historical records help support our belief that you are best served through a portfolio diversified across six distinct asset classes: fixed income, U.S. large cap equities, U.S. small cap equities, international equities, real estate and commodities.

Now is the time to review your entire portfolio, including all your investment holdings, whether you have mutual funds, company stock, 401(k) plans, IRA accounts, brokerage accounts, certificates of deposit or money market funds.

With our technical expertise and comprehensive wealth management perspective, we can organize your investments into a coherent asset management program customized to the unique promises you make – and will make – in life. Let’s review your investments together and make sure your investment program is one you can rely on to help you honor the important promises you make.

Call us today at 858.752.1726 to schedule your personal wealth management review.

Sincerely,

Dion Gouws, CPA