April 21, 2009

Is It Safe to Exhale?

March 9th, 2009 was not exactly what I would call a good day at the office. The Dow Jones Industrial Average was trading below 6500, and financial network commentators were declaring it a virtual certainty that the Dow would be testing the 5000 level over the next few days. As I spoke on the phone with nervous clients, I could hear the television talking heads yelling about the coming Armageddon in the background.

Now lets fast forward just a few weeks to the present time.  Not only did the Dow not test the 5000 level, it rose 25% to the 8000 level. Newspaper headlines have changed as well. Along with articles focused on economic news, there are even more stories about pirates, the “octomom”, twittering, domestic violence, and Susan Boyle. In fact, last Sunday’s New York Times front page did not contain a single story on the economy.

HAS THE CRISIS ENDED?
The economic crisis is far from over, but along with the bad economic news, we are beginning to hear some good things as well. The tenor of the coverage of the economy seems to have changed.  There has been a marked decline in “doom and gloom” talk and a new focus on whether the economy is, indeed, on the mend.

While pessimists are still insisting that we are in a bear market rally, most objective reports are pointing to early indications that we may be in the nascent stages of a recovery. A new survey by the National Association of Business Economics, released Monday , showed that while our economy remained weak, there were signs in the 1st quarter that the decline is slowing.

Many of our large financial institutions have stabilized; some companies are actually making money, real estate is selling again (albeit, mostly at very depressed prices), consumers are more confident, and there are early signs in particular business sectors of a turn around. Some business writers have begun to refer to a new phenomenon, “green shoots”(i.e. “green shoots are beginning to poke through the rubble”), raising hopes that the worst is over.

And, anecdotally, clients are calling the office once again to inquire about cheap stocks and investment opportunities. On evening walks with my wife, we have noticed that a couple of our neighbors  have just started  major re-modeling projects. Apparently some folks are beginning to exhale.                           

We are not yet out of the woods. Although at a slower rate, foreclosures are still  rising , unemployment is still increasing, and  real estate prices are still dropping. Some major companies and financial  institutions remain on life support.

THE FEAR FACTOR
What drove down this market to unforeseen, painfully low levels was the mass hysteria that took hold of the American public. Certainly, the greed and mismanagement on the part of some financial behemoths and the ripple effects of the sub-prime debacle played major roles in sinking the economy and the markets.  But when talk of Armageddon was all one heard 24/7 from every news source, the world’s financial system buckled under the weight of it all. The actual economic triggers combined with the media hype and exploitation drove us to the verge of global collapse and prices on virtually all asset classes plunged.

As I look at where we are today, versus the period from October 2008-March 9, 2009, I can say with confidence that there is, indeed, a major difference. That difference is that the apocalypse has not occurred and the threat of such a doomsday scenario seems to have passed. The patient  is still in a severely weakened conditioned , but there is reason for cautious optimism . One thing I can personally attest to is that the fear level has declined.  It is safe to go outside again.

WILL THE MARKETS CONTINUE TO RECOVER?
While signs that the economy will continue to recover and businesses to pick up should encourage us, we must understand that this will not occur in a linear fashion. The Dow will not go straight up, and there are never certainties in the short-term. Some companies will fail, unemployment will continue to rise for a while and inflation will rear its head again.

As I have written to you time and again, there is cyclical nature to our economic system. Eventually problems are solved, as surely as new problems will arise again. In my view, the uptrend has begun and long-term investors can come out of hibernation and assess their opportunities.

CONCLUSION
The number one lesson to be learned from this crisis is that consumer confidence plays a major role in the health of our financial system. When the public is whipped into a frenzy and a collective panic takes hold, everything shuts down and the economy contracts. The number two lesson is that market timing is next to impossible to succeed at and that panicked selling can be disastrous. Investors who panicked and sold after hearing about the testing of the 5000 level missed out on the near 25% Dow increase of the past six weeks.   The markets seemed, almost miraculously, to turn around as soon as the public capitulated. 

A long-term, age appropriate investment strategy with a proper diversification of risk is, potentially, the most effective way to navigate volatile markets and to achieve financial success. Finally, strictly from my point of view, a steady diet of news headlines focusing on military rescues, unexpected singing sensations and bad behavior of celebrities, is just what this economy needs.

Austin A. Frye, MBA, JD, CFP®

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