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"If you don't
have a vision for the future, then your future is threatened
to
be a repeat of the past."
~
A.R. Bernard
The Markets The stock
market and life seem to have at least one thing in common.
Both go through transitions over time.
As we age, we move from
one stage of life to another such as from infancy, to childhood,
to adolescence, to young adulthood,
to middle age, and then to senior adulthood. How well we
manage these life transitions goes a long way toward our
success and fulfillment in life. The stock market is no different
as it is in the midst of a wrenching transition. How we deal
with this transition—both proactively and reactively—will
help determine your ultimate financial results.
It’s always dangerous to say “this time is different,” but,
the reality is, each time the market experiences difficulty,
there’s a unique set of circumstances that leads to
the difficulties. In our present situation, unusually low
interest rates and easy credit terms in the early to mid-2000s
led to an unsustainable speculative housing boom that is
now painfully unwinding. The low interest rates also drove
down the value of the dollar and that helped cause commodity
prices to soar and inflation to rise. The net result is consumers
are hurting, corporate earnings growth is slowing, and the
stock market is correcting.
To deal with this transition,
here’s the process we’re
following:
- First, we’re analyzing
the root causes of the problem.
- Second, based
on our understanding of the causes, we’re developing
a working thesis for who we believe will be the winners
and losers in
this environment.
- Third, we’re adjusting our clients’ portfolios
to try to take advantage of asset classes that may benefit
from the current environment and to avoid the asset classes
that may be hurt.
- Fourth, we remain ever vigilant
in incorporating new data into our working thesis and
making adjustments that
we deem appropriate.
Despite our best efforts,
there will likely be bumps along the way. As of last week,
the decline
in the Dow Jones Industrial
Average brought it within a whisker of the traditional definition
of a bear market, according to Barron’s. In markets
like this, there are few places to hide.
Over time, we expect
the economy and the financial markets to find some stability.
Once that happens, the stock market
may turn up again and we’ll do our best to take full
advantage of it.
| Returns through 6/27/08 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Dow Jones Industrials |
-4.2 |
-14.5 |
-15.4 |
3.3 |
4.8 |
2.3 |
| Nasdaq Composite |
-3.8 |
-12.7 |
-11.1 |
4.2 |
7.3 |
2.0 |
| Standard & Poor's 500 |
-3.0 |
-12.9 |
-15.0 |
2.4 |
5.5 |
1.2 |
Source: Yahoo! Finance, Barrons
Past performance is no guarantee of future results. Indices
are unmanaged and cannot be invested into directly. Three-,
5-, and 10-year returns are annualized. Assumes dividends
are not reinvested.
SINCE WE’RE
NEARING BEAR MARKET TERRITORY, it makes sense to review
what a bear market is and to discuss what has been done
from an historical perspective. While there’s no standard
definition of a bear market, The Vanguard Group says one
common definition is a decline of 20% or more over at least
a two-month period. Using that definition, Vanguard says
we’ve had 10 bear markets in the U.S. over the past
50 years.
Here are some statistics on what the last
10 looked like (all data is based on the S&P 500 Index):
- Shortest duration – 2.9
months from July 1990 to October 1990
- Longest duration – 30.5
months from March 2000 to October 2002
- Average duration – 14.1
months
- Smallest decline – 19.9%
from July 1990 to October 1990 (while this is less than
20%, Vanguard
included it
in the list)
- Largest decline – 49.1%
from March 2000 to October 2002
- Average decline – 30.4%
If the current correction should
turn into an “official” bear
market, the above figures may help us keep perspective on
the decline. Since the S&P 500 hit its all-time record
high back in October 2007, we would already be eight months
into the new bear market should the S&P 500 cross that
20% threshold in the next few days. Of course, we have to
let you know that past performance is no guarantee of future
results. Markets will do what they want and they don’t
necessarily have to follow a script from the past.
With that
said, it’s important to understand the
past. From the above data, here are several key points we’d
like you to keep in mind:
- First, bear markets are normal.
Over the past 50 years, we’ve had 10 of them – that’s
an average of one every five years.
- Second, the last
bear market ended in October 2002, which is more than
five years ago. If we enter a new bear
market now, that would be in line with the historical
average.
- Third, every bear market in
the past eventually gave way to new record highs in
the S&P 500, according
to data from Vanguard and Yahoo! Finance. We have no
reason to think this time will be different.
- Fourth, bear
markets can be ugly. As equity investors, we may have
to endure the pain of the occasional bear market
in order to reap the potential long-term attractive
returns offered by equity investing.
As always, we’re available
if you have any questions.
What Do You Know About
The Founding Fathers?
1. Who are the Founding Fathers?
2. Which
of the Founding Fathers said, “Fear is the
foundation of most governments; but it is so sordid and brutal
a passion, and renders men in whose breasts it predominates
so stupid and miserable, that Americans will not be likely
to approve of any political institution which is founded
on it.”
3. Which signer of the Declaration of Independence
was responsible for the term “gerrymandering,” after
he redistricted the state of Massachusetts to give advantage
to his political
party?
4. Two of our Founding Fathers signed the
Constitution and served as President. Who were they?
Click here for the answers.
Thanks for your trust & confidence,
P.S. DON'T KEEP US A SECRET! At Ford Wealth Management we know that referrals from your friends, family and colleagues are the sincerest form of flattery. We appreciate your business and hope that you will pass along our name and number to anyone who would benefit from our services.
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