A Bounce Off of a New Low
The stock market rally which began March 10th caused people to take notice and has given us a sense of hope that better times are ahead. The S&P 500 has jumped 24% over the 19 trading days since the market made a new low on March 10th. As a cautionary reminder, we need to remember that we have been here before. The November-December recovery gained 21% over 17 days ending in early January. Then the stock market fell off a cliff and sank to 12 year lows by early March.1
What makes this latest rebound different from the last one? There is some evidence that suggests that this rally will be more durable. The main distinction from this spring rally is that the patient, being the US financial system, has had more time to be resuscitated. Time is what was needed most to heal our economic framework. The stimulus programs instituted by our government have not created tangible economic results, yet. The effectiveness of these stimulus programs is still being debated. Nevertheless, the more time that passes, the further the credit crisis apex will be in our rear view mirror.
This past first quarter covered some of the darkest days of my career. At one point, the S&P 500 was down over 25% just since the start of the year. At that time in early March, the decline since September 30th was over 45% in slightly over five months. The latest rebound in the last part of March and spanning into April cut the losses for the first quarter of 2009 to 11% for the S&P 500 index.
An Investment Revival
You will hear an argument rage on in the media. Is the economy bottoming? Will the stimulus actually usher in a recovery? How bad will corporate earnings be in the first quarter and are stocks set to retreat towards their March lows after these reports? The most useful interpretation of this slew of economic data is that it will be viewed positively. For the near term, it is most likely that stocks will shrug off bad news and stay well above their lows from last month. The broad stock market has notched six straight quarterly declines dating back to 2007. It wouldn’t necessarily take positive news to cause an improvement in market performance. Gains could materialize with simply a deceleration of bad news. Much of the current economic woes are already discounted by the stock market. Many economic indicators are already past their greatest rates of change and their rate of deterioration is slowing.
Another case for an investment revival is that at some point investors will begin to seek a decent return on their remaining investment dollars. How long can zero be an acceptable rate of return? Cash equivalents like treasury bills, certificates of deposit, and money market funds are yielding almost zero percent. Yet balances in these investments are at record levels. What will happen when some of this money starts to be deployed for the purpose of earning a higher return? Stock prices are at such low historic levels, it is very likely that a significant money flow could steadily re-enter the stock market based on these low valuations. Furthermore, if these new investments in the stock market are not met with losses, investors could gain new confidence in stocks which could fuel a further rise in prices.
Staying Ahead of the Curve (Part Two)
The best course of action over the past year was to sell stocks. Investors stayed ahead of the curve by minimizing losses throughout this stock market decline. I wrote about staying ahead of the curve in my last Market Overview. If the stock market continues on a recovery trend, it will be crucial for us to increase the equity exposure in our client accounts. Even though our clients’ portfolios declined substantially over the past year, our losses could have been far deeper had we continued to hold all of our stocks. Now with evidence of a recovery under way, the best way for assets to thrive is to increase our stock investment weightings, hopefully before this advance has run its course.
Peregrine Returns and Strategy
Since we drastically reduced our stock market investments over the past year, our composites declined only minimally in the first quarter. We own a substantial position in long term treasury bonds for both our Equity and our Balanced composites. These bonds lost 10.8% as a total return for the quarter and this deflated the returns for both of our composites. Despite that holding, our Equity Composite fell only 1.14% and our Balanced Composite fell just 1.51%. These returns beat the S&P which lost 11.67% for the quarter. Peregrine Composite Portfolios also handily beat the average equity mutual fund which was down 8.92% for the first quarter.
We are planning for more volatility in the months ahead. We are also engaged to take advantage of this volatility and profit from it. Market timing will be important. We fully expect our clients to have positive investment returns for 2009. Although caution and loss avoidance will continue to rule the road, we plan to gradually increase our equity exposure as the quarter unfolds.
1 Source: Wall Street Journal 4-6-09
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.