The World is Not Well
It would be difficult not to compare this past summer with the financial crisis of 2008. World economies were turned upside down and this calamitous roller coaster seems to want to continue into October.
Economic problems in Greece and the threat of defaults from other European governments such as Italy have brought the European crisis to a head. Many banks in Europe hold the bonds of these flagging countries. If a nation defaults, it could cause a banking crisis whereby large banks, mostly French, could default.
We all remember the waning days of July as our country wrestled with the budget deficit ceiling. Legislation was passed to raise this bar but not before stocks dropped sharply in the week preceding and the week following the decision.
Over the past three months, signs of global economic weakness became more apparent. It is commonly accepted that our country is heading for another recession. No improvement in the job market is on the horizon.
Remember that stocks staged a terrific advance at the end of June. The argument that I made at that time was that stocks would perform well in a sluggish economy because interest rates were low and corporate profits were high. This view has not worked, so far. Investors dumped stocks due to fear factors. The worldwide havoc caused selling in stocks as investors rushed to the sidelines fearing the fallout in a slowdown in the worldwide economy and the crisis in Europe.
The S&P 500 first hit 1200 in 1998. Today, 13 years later it sits at 1155! Goodness sakes. That is dreadful. That means the return on stocks is a paltry few percent per year which is the dividend amount. The good news from this is that over this period of time, stocks haven’t rested below 1200 for too long. During periods when stocks dipped below 1200, we only had to wait a few months before they peeked above that level. This is why we should be confident that the current trend is soon to be reversed. Stocks have dropped 5 months in a row. This downtrend has to be getting long in the tooth.
3rd Quarter Overview
It was a quarter where we would have been best served by holding only bonds or cash. The benchmark S&P 500 fell 15% in the quarter. In the two week period between 22 July and 7 August, the drop was 15%. There was also a lot of volatility as many individual stocks fell over 40%.
In the meantime, Treasury bonds emerged as the asset of choice. In fact, the recent sharp drop in gold prices pushed T-Bonds into the most favored status among asset classes. Lower long term interest rates is one positive force for stocks. Our clients with long term Treasury bonds have seen substantial appreciation of these investments. A stubbornly weak economy causes bond prices to rise. So far, the total return on long term treasury bonds is up over 20% for 2011.
Signs of economic weakness weighed down commodity prices. Oil, copper and all of the agricultural commodities took large percentage dives. This event can give us reassurance about the inflation rate on these elements. Commodity price declines point to lower prices for many consumer items, namely food and fuel.
Peregrine Returns and Strategy
For our taxable accounts, we were able to short stocks in order to profit from the trend of this downturn. These moves, and our holding of Treasury bonds were not enough to offset the decline in stocks. Our Equity Composite fell 9.59% for the quarter and is down 7.07% for the year. Our Balanced Composite fell 2.37% for the quarter and flat for the year. It is a relief that clients with bond holdings have their portfolios largely in tact so far this year.
We all know from experience that when stocks go down, buying opportunities start to abound. At these depressed levels, most stocks are very cheap relative to their business prospects. We will continue to look for good opportunities.
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.