There is no doubt that 2008 will be remembered as one of the most remarkable years in the history of the global stock market (and not in a good way). Events have occurred that almost nobody could have predicted, although many seem obvious in hindsight. However, we must move forward. We can’t dwell in the past-we have to learn from it. So what can we find out from the previous downturns?
1987 Black Monday – It was the largest one-day market decline in history. The general reaction by investors was a huge dumping of stocks, good and bad. The panic crystallized losses, and many investors went to cash to avoid further trouncing-not a wise move for long-term investors. The markets recovered, but many investors were not able to participate in the upturn because they had sold out and were waiting for "just the right moment" to get back into the market.
1990-91 Recessions – Companies were laying off staff by the thousands (just as at present). They restructured, cut costs, merged with competitors, and did all the things they should have done in the good times, but didn’t because times were good. Investors, scared by the glum news, continued to wait on the sidelines. Unfortunately, all this cost cutting and restructuring led to companies making unprecedented profits and therefore optimum stock market performance for the next 10 years (with a few bumps along the way).
2000 – Everything was great, especially in the fancy new technology companies. Most people felt that the old way of doing business was out and that if it was on the Internet, it would lead to profits. Unfortunately, what really went out the door was the ability for people to use common sense and calculators. We all know the result of overbuying in a particular sector…a big drop! This plunge frightened perfectly reasonable investors out of the market once more and out of good companies. Again they waited on the sidelines until the markets were high and again moved back to risky investments.
Current Times 2008 – What I’ve seen is a reminder of just how much capitalism is dependent on confidence. What we are experiencing in the stock markets is a lack of confidence, but what we are certainly not seeing is a lack of good investment opportunities. This is not a crisis of business fundamentals (most, but not all, businesses are still very strong), but a crisis of confidence in investing in the future.
Without confidence, the price of any asset (stocks, bonds, commodities, real estate, and your car) becomes separated from its true value. If investors lose faith and trust in the process, asset prices become disconnected from expectations of future earnings and profits and are left to nightmarish emotional scenarios. When this happens, a fundamentally good investment can appear to be worthless overnight simply because nobody will buy it, as they are convinced that the prices will fall further. Rather than making careful assessments of future earnings and risk versus reward, potential buyers prefer to wait until sanity returns. Of course all this waiting and lack of purchasers pushes prices down further, increasing the downward spiral.
As we head into 2009, I believe times will stay tough over the year. And, as a result, they will do as in every recession – cut costs, re-structure, announce lay-offs, buy up competitors at reasonable prices, and all the things they neglected when times were good. This inevitably leads to higher profits and stock growth (we just don’t know when).
Control what you can…your own spending! Know what you can truly afford and what should be put on hold until times get better.
Here are some positives as I look out into 2009:
• Companies’ valuations are low, which means they are cheap compared to their revenues.
• Oil prices are lower, which is good for everyone but oil companies and the Canadian dollar.
• Banks are becoming more prudent and stricter in their lending practices
• Bad investment lending companies have been removed, for example, Lehman Bros., Bear Stearns.
• There is a global political effort to solve this mess that has never been seen before.
• Lower interest rates for variable rate mortgages or lines of credit
• Strong companies will show increases in dividends.
• Obama and other global governments want to expand jobs and infrastructure spending.
• Most importantly, we realize that downturns don’t last forever – we just don’t know when they will end. What we do know is that we would rather be in the market when it turns than sitting on the sidelines waiting for the magic moment to get back in.
2008 has been a trying period, but there is no other place I’d rather be than an advisor through these times. Take time to set your goals and financial plan and get 2009 off to a good start!