A Tale of Two Bulls

1Q 2009

In the six quarters since we began writing these summaries, there’s been little opportunity to mention bull markets. Indeed, with the S&P 500 falling another 11.0% to start 2009, and the included statements likely reflecting still lower valuations, you may be thinking it’s odd to even use such a phrase to describe the recent investing landscape. However, if you’ll read on, we’ll describe the TWO very different bull markets that have occurred over the last three months.

In early March, the bull market for pessimism was strong and building. Nearly everyone could point to the factors leading to the market’s decline (lingering credit crisis, troubling economic data, weak corporate earnings, etc.), and the number of negative headlines produced by the general and business media were most certainly up by more than 20%. At some level, this was understandable as the S&P 500 had fallen 57.7% from its October 2007 peak, and had secured its place as the second worst bear market in history. As a result of the fear generated by this backward-looking analysis, hoarding cash and preserving liquidity seemed to be the only games in town. Not surprisingly, the Associated Press published an article showing that money market balances had soared to $3.9 trillion.

However, it turns out that the extremely negative sentiment associated with those conditions ended up sowing the seeds for a bountiful harvest to finish the quarter. It took only 13 trading sessions for the S&P 500 to bounce 20% of its lows, and by early April the market had put in its best four-week rally since 1933. As has been the case in prior cycles’ inflection points, the shift from a bear market to a bull market occurs once the markets have discounted the worsening rearview mirror and have peered more optimistically into the future. Although we are not suggesting that the world is now clear of future economic potholes (a lot of uncertainly remains), the market’s ability to digest the data has seemingly improved as investors are once again displaying a greater appetite for risk. It’s worth noting that both Emerging Market equities and High Yield bonds actually posted slightly positive quarterly results.

Short-term, the market outlook will be heavily influenced by still-fragile investor psyche and the degree to which aggressive public policy translates into economic traction. With $12.8 trillion either spent, lent, or committed, the U.S. government and the Federal Reserve have certainly made a strong push to stem the ongoing recession. Following such a strong “snapback rally”, and considering the issues still at hand, a period of backing and filling may be necessary to confirm the present bull market in equities.

Longer-term, we expect a de-leveraged consumer with a more normalized savings rate (currently 4.2% and rising), and highly efficient corporations. We believe these are generally healthy developments for the market. Unfortunately, higher taxes and elevated inflation may result from the government’s current efforts to stimulate the economy. While there will always be some challenges to address, as your advisor it’s our sole intent to build plans that will best service your individual needs. Maintaining a diversified exposure to the global array of investment alternatives, and resolving to make necessary adjustments along the way, is the best we can do to help see that your financial outlook remains bullish.