Confidence is the main ingredient currently missing and the reason for such market volatility. Until we have consumer and investor confidence that we have seen the worst, and better days are ahead, we will not have the lift we need to bring stock prices back in line with true company valuations.
Media and street talk is all gloom. Global recession is more and more likely and even Canada is reported to be in a “technical recession”. On Nov 20, 2008, The US market (S+P 500) was down 48% Year To Date, Canada -44%, Europe and Asia -40% to -58%. Our average client portfolio is down about 30%. Less than the indices due to bond and cash holdings and active managements, but still quite a drop for what we call conservative investing, meaning investing in high dividend payor stocks.
Consumer confidence is at an all time low, even lower than during the early 1990’s recession. You and I have stopped or reduced spending, travelling, renovating etc, self-sabotaging the situation even more out of fear that this could last for months and knowing that the economy will likely not recover until at least the spring of 2009 or even 2010.
So why, I am asked daily, aren’t we selling what is left of our portfolio, park the funds for a few months and get back in just before the lift off. Well, simply because I don’t know when that will be. In fact, current companies valuations are so extraordinarily low that it makes a very strong case for a rally.
Do these drops make sense? Many companies are currently trading below book value. Some even have more cash on hand than the current price of the stock on the market.
Frank Holmes, Chief Executive Officer and Chief Investment Officer at U.S. Global Investors, says today Nov 24th, that while the market’s pain is not over, he expects a rebound to start with a Santa Claus rally at the end of the year, after some year-end profit-taking and tax-loss harvesting. Holmes noted that markets are down “three standard deviations over the last 60 days,” a condition that has happened just a few times over the last 50 years, each time being met with a big price rebound of as much as 25 to 33 percent. UBS says the same. Read more here.
Europe had a historical rally yesterday, Today, the US is cheering further Citibank rescue and the Obama economic plan and new team. Crude rockets +9% and Canada is welcoming the news with a 4% increase.
Street & Market confidence can lift quickly if we get good news among the bad recession facts. Markets look ahead and so should you. Stay put. Markets always in time recognize the true value of good stocks. The best thing to do is nothing, stay the course, buy low if you can make an investment and stick with the plan. We are confident that with 40% to 50% the markets have no where to go but trending up.