Sunday, May 24, 2009
Shoots of Recovery?
By Winthrop Quigley
Journal Staff Writer
It has been a very long winter for investors.
The Standard & Poors 500 Index was at 1192.70 on Sept. 15, the first trading day after the Lehman Bros. bankruptcy that started the stock market bloodbath. By March 9, it had tanked to 676.53.
These days, the S&P is trading around 900, consumers seem to spending a bit more freely, some housing markets are showing a little spark, and previously glum policymakers are suggesting the worst of the worst economic recession we've seen in decades might be over.
The financial press is full of speculation that the green shoots of recovery, as Federal Reserve Chairman Ben Bernanke put it, might be peeking through the snow.
Are they? What should the average investor do about it, if they are?
Wells Capital Management chief investment strategist James W. Paulsen said in his May letter to investors that markets are being led higher by stocks that are sensitive to economic recovery, including those of retailers, technology companies, transportation companies and small companies. Some commodity prices are up, and Baltic freight rates, which measure ocean shipping activity (and, therefore, global trade levels), are higher. The spread between low-risk bonds and higher-risk junk bonds and corporate bonds is narrowing.
"The Wall Street bottom indicates an economic bottom is not far away — perhaps by late spring or early summer," Paulsen wrote. "And evidence of a bottom on Main Street would cause Wall Street to erupt!"
Even so, the skeptics say, just because things aren't as bad doesn't mean they're good. Unemployment is at levels not seen since the 1974 recession. According to Morgan Stanley, the last two quarters have produced the worst back-to-back decline in gross domestic product in 50 years.
University of New Mexico finance professor Gautam Vora said that things are "looking slightly better because they are not getting worse." He thinks recovery will arrive in 2010. "There are still a lot of problems waiting to be revealed," he said.
"Eventually, green shoots or no green shoots, the U.S. economy will improve," said Brian McMahon, CEO and chief investment officer of Thornburg Investment Management in Santa Fe. "Some ingredients necessary for improvement have fallen into place, things like lower energy prices, much lower housing prices, lower mortgage rates." That leaves consumers with more money to spend, he said. When federal stimulus spending starts this summer, "we'll start to see some real green shoots that will develop, and at that point, hopefully, we'll see the loss of employment slow down," McMahon said.
How investors should respond, as is always the case, will depend on personal factors, such as age, risk tolerance and financial goals, the experts say.
A lot of investors want to allocate a certain percentage of their holdings in specific kinds of investments — perhaps a mix of bonds, small-company stocks, big company stocks and foreign stocks. One conventional rule of thumb suggests that a young investor put 80 percent of her holdings into stocks, while older investors might have 50 or 60 percent of their assets in stocks.
The stock market collapse has probably changed everyone's allocations drastically from where they should be, Vora said. Garth Scrivner, senior investment counselor with StanCorp Investment Advisers, is advising clients to rebalance their portfolios to get asset allocations back where they want them to be. "Focus on things you can control," he said.
"We tell clients it doesn't really matter what the market is doing a year from now, because you should be a five- and 10-year investor," Scrivner said. "We think they should maintain a disciplined approach instead of getting scared and running for the sidelines."
"Whether someone should get back in (to the stock market) depends on whether they have an appropriate allocation for their age and whatever their liabilities might be, including liabilities for future living expenses," McMahon said. If an individual's strategy dictates he should have stock, "by all means, I think equities are reasonably enough valued right now that people should be buying them," McMahon said. Several equity valuation measures "are blinking green right now."
"My generic advice is to be rational," McMahon added. "Everybody has to take stock of what his situation is. Some people who have been maybe too bold have been irrationally aggressive in their investments. There are probably others who are now irrationally afraid."
McMahon and Scrivner agree current stock market valuations present a buying opportunity. Scrivner thinks it's an opportunity that only comes around every 20 to 30 years.
Younger people especially should consider stocks at these prices, McMahon said. "I don't think there will be very many people under 40 who, if they step it up a bit in 2009 and invest more in stocks and bonds, will be unhappy about that 10 or 15 years from now," he said. "But you have to sit down and think about it a little in a quiet place in a quiet way.
"It's always interesting to me when prices of investments go down people feel the urge to sell them and not buy any. I hear people say they don't want to get into the stock market until things settle down. The English translation is they don't want to get into the stock market until prices go up."
Vora, who is president of the American Association of Individual Investors Albuquerque chapter, thinks the risks of stocks are too high relative to the return they are offering. Investors with cash should consider high quality long-term bonds, especially inflation-protection bonds issued by the government, Vora said.
Although stocks have climbed since the depths seen in March, "I have a great deal of doubt how long this particular bounce will continue," he said. Vora thinks some changes in the economy, including a significantly reduced level of consumer spending, will keep stock prices low for some time to come.
"A large number of persons won't be able to handle the changed economic profile," Vora said. "If you can't, why go into the market? Stay safe. Do your life's work. Enjoy your family."