Current Market Volatility
We are certainly living in challenging and extraordinary times. The market events of the last few months will no doubt be studied one day in finance and economic textbooks, much as the Great Depression, the bear market of 1973-74, the crash of 1987 and the tech bubble of the late 1990s are studied today. We are witnessing historic global transformations in the financial and credit markets that have produced wild swings in the financial markets.
Between the bursting of the housing bubble, the subsequent credit market contagion, and the ultimate near freeze-up of credit markets, it's now obvious that this is no longer just a US problem. The entire world, from the most developed to the most emerging economies, is now struggling. It's no longer a question of whether or not the US is in, or will enter, a recession, but when the global economy will come out of recession.
The Markets and the “October Fear Factor”
The last several months, and especially the tail-end of September and into October , were tremendously volatile. The daily index market swings have been much more violent and pronounced than we've experienced in years, perhaps in the history of our markets. The S&P 500, for instance, was down 16.8% for the month of October (-32.8% ytd). This included single-day drops in which the index was down 4.0% (10/02), 3.8% (10/06), 5.7% (10/07), 7.6% (10/9), 9.0% (10/15) and 6.1% (10/22).
By the end of October, the Dow was down 30.6% from its October 2007 high (10/10/07), the S&P 500 was down 32.6% in that same period, and the NASDAQ Composite was off 39.8% since its October 2007 high (10/31/07). We are squarely in bear-market territory.
Recession
Before the fallout from the housing and credit crises intensified to today's levels, it appeared there was a chance that the US might skirt a recession. That possibility has all but disappeared; furthermore, this recession will probably be global in nature.
Pundits may argue as to when the current recession officially started. What's more important, though, is (1) when this recession will end, and (2) putting it into historical context. Since 1945, the US has faced 11 recessions, not counting the current one. The average duration of those recessions was 10 months; the shortest was 6 months (January-July 1980), while the longest (November 1973-March 1975) lasted 16 months.
In terms of market performance during past recessions, the Dow Jones Industrial Average fell an average of about 24% in 10 of those periods (in the recession of 1945, the Dow was actually in positive territory), and, on average, hit bottom 3 months prior to recession-end. While we don't know when the current downturn officially began, the Dow was down about 28.2% year-to-date through October, and more recently, down 13.9% just for October.
This does not necessarily mean that we are out of the woods; but, assuming that the current recession began in January, and that history is a relevant guide (though not a guarantee), we may be closer to the end than the beginning.
The Good News
While recent events have been disconcerting, the market has recovered after similar periods of stress . After September 11 th , and after market collapses caused by the S&L crisis and the bursting of the tech bubble, the market has always rebounded to levels higher than they were before the crisis (see chart below). Clearly, staying in the market through a crisis has paid off in the long term, so it's important to remember to take a longer-term view.
Source: Wilshire Associates
*LTCM stands for Long Term Capital Management, Past Performance is no guarantee of future results
So What Should I Do Next?
We have now entered a time of uncertainty, in some ways reminiscent of 1987 or 2001. But unlike 1987, when the pain was contained primarily to one day, today we've experienced seemingly endless daily drubbings. During times like these, many investors panic and rush to eliminate their market exposure. This is unfortunate because investors who have been successful in the past tend to look at this kind of volatility as an opportunity to acquire quality assets at discounted prices. For example, last month Warren Buffet announced he was buying “American” -- stocks that is -- in his personal account, where he previously owned nothing but US government bonds. His rationale?
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.
© 2008 SEI
Our advise to you – stick with your game plan. If you are not sure your current game plan is right for you, please call us at 510-235-1044 and come in for a financial check up. That's what we're here for.
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