Can another bubble happen?
Asset bubbles are fascinating. What makes a bubble? Irrational exuberance. It is a speculative mania in anything and is followed by an abrupt and steep decline. Bubbles are accompanied by a distinct herd mentality both on the rise and on the decline. Most importantly, a bubble is only registered after it actually bursts. It is the collapse in price that makes a bubble a bubble. For example, the housing bubble was not really a bubble until housing finally met its fate. Before the housing market crash, there were all sorts of rational explanations given to substantiate the runaway real estate values that occurred in the mid 2000s. The herd was willing to accept any explanation for home values soaring. After the decline, however, all of those explanations proved to be “irrational.”
Our stock market bubbles have been punctuated by crashes in 1929, 1987, and the tech stock bubble which crashed in the 2000-2002 period. Most recently, stocks crashed in the 2008 financial crisis along with housing. Prior to these instances, speculative excess was followed by a selling panic. Since two of these bubbles occurred within six years, most people think bubble events are with us to stay. Is the excessive exuberance and ensuing panic a fundamental behavior pattern of investors?
Despite all of the attention on bubbles and people’s worry over a stock market crash, it might be years before we have another bubble in the stock market. Concurrently, this means there is no steep decline in store for stocks. A slow growing economy coupled with carefully managed companies should mean less volatility for stocks. The environment suggests more stability for the overall stock market and less volatility. Instead of wild swings up and down, stocks look more likely to grind higher with slow and steady economic growth. Sure, a 5 % to 10 % correction could happen and this would lead to anxiety, but evidence points to possible stock market declines being short lived and superficial.
Ben Bernanke and Tim Geithner have proven themselves stellar managers throughout the financial crisis, the succeeding recession, and this stubbornly slow recovery. Their direction has averted a much more severe outcome and their continuing work has paved the way for the evident recovery that is sprouting today.
1st Quarter Overview
The stock market raced ahead in the first quarter. The 12% gain in the S&P 500 index eclipsed the nearly 6% gain in the first quarter last year. This 2012 first quarter was the best Q1 gain since 1998.
This month, the market did receive a shock. On Good Friday, the Department of Labor reported only 120,000 new jobs created in March, far off the previous months’ gain and well below expectations. The news sent fears ripping through the markets and so far the S&P has given back about 4% of its 2012 gains.
The concern over the disappointing jobs report and the continuing worries over the malaise in Europe explain the recent dip in April. This decline should be relatively shallow and brief. Companies in the US stock market present the best investment situation to investors around the world.
This means the only course for stocks, this year, is up. If the economy continues to show modest or even accelerating improvement, the market will rise as expected. If the economy stumbles and economic weakness sets in, there will be another Quantitative Easing program engineered by the Federal Reserve and Ben Bernanke.This creates a positive scenario for stocks in either case.
Peregrine Returns and Strategy
Since last September, many new and promising companies have been added to our client accounts that can become cornerstone investments. Some of these companies are very large companies whose fortunes are recovering. In other situations, investments have been made in dynamic and rapidly growing companies that may be smaller in size, but where growth can be much more rapid.
This month marks the beginning of another earnings announcement period for companies. During this time, we can realize profits by taking action on carefully selected companies just prior to the release of their earnings.
The Facebook IPO is set to take place in May. It will be the largest IPO in the tech sector since Google and it will catapult Facebook to a $100 billion market cap. We plan to invest in this company both for trading and investment purposes.
Our Equity Composite rose 7% in the quarter. Our balanced account rose 4%. Our composites lagged the stock indexes mostly due to our conservative equity weightings in which we owned too many bonds and not enough stocks.
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.