Economic Update: April, 2009
By Mark Oelschlager, CFA
April 10, 2009
Note: Since the writing of this Update, there have been positive developments in the hostage situation with Capt. Richard Phillips, and we’re very happy to hear of his safe return.
From the March 9 close to the April 9 close, the S&P 500 climbed over 26%. As is usually the case, the rally came when few were expecting it and when things looked bleak. Even though it has been only one month, it is easy to forget how bad things looked that short time ago. The economy was in the doldrums, the government was trying to figure out a way to restore confidence in the financial system, the near-term outlook for corporate profits was poor, and the stock market was plummeting. As a result, people were skittish about the market, and understandably so.
The ensuing rally proved once again the danger in trying to time the market. The 26% move, based on historical averages, is roughly three years worth of returns. Yet it came in one month. Of course, this rally hasn’t gotten us back to the highs of 2007, and it has still been a painful correction, but those who stayed the course during the first quarter decline are significantly wealthier than they were one month ago or even since the beginning of the year. In fact, the market is now back to where it was in late October.
We don’t know how long this rally will last – we certainly know it can’t keep going at this pace - but one encouraging sign is that there is a lot of skepticism accompanying this rally. That is generally a good thing. The bears might point to the aforementioned list of woes and argue that they have yet to be fixed. They have a point, but progress is being made. The economic data is improving. Recent sales data for many retailers was better than expected. Exports in February rose for the first time in seven months. Inventories are shrinking. The commercial paper market is perking up. The economy still has a long way to go to get back to full output, but progress is being made.
The growth in exports is a bit of a surprise given the fact that countries everywhere are struggling economically. When coupled with slowing imports, this growth in exports means that our trade deficit has shrunk dramatically – to a level not seen in almost ten years. This reflects the retrenchment of US consumers, which could be viewed positively or negatively. But one hopes that those that for years have railed against our trade deficit are heartened by the latest developments.
A recent Wall Street Journal article highlighted some investment managers who had raised their cash levels in order to minimize downside during the correction. Some of these managers had more than 30% of their funds in cash. This helped them when the market was falling, which is why they were profiled. Leaving aside the issue of when they actually began to increase cash, it would be interesting to see how many redeployed that cash in time to keep up with the market during this rally. Our suspicion is that very few were able to pull it off. Despite the fact that we do not engage in such market timing, our Funds generally held up better than the market during the correction: all Funds significantly outperformed the S&P 500 in the first quarter. (Please refer to the performance page of our website for complete performance.)
These are difficult economic times, and the actions by the government and the Fed have long-term implications, which we discuss internally on a regular basis. We have always tried to be long-term thinkers, and we continue to manage our portfolios in that way.
A comment on the Somali pirates situation. In recent months the hijacking of ships in the Indian Ocean has become a major problem for the shipping industry. Ransom payments are absorbed by insurance companies, which results in higher premiums, which raises the cost of shipping, which raises the cost of goods for consumers worldwide. These despicable acts don’t produce anything; hijackers just skim money from the business of global trade, at the same time putting sailors in danger and causing anguish for their families. The good news is that usually these sorts of actions eventually peter out, because those affected find ways of preventing it. There is no easy solution, but we are confident that one will be found. One thing working against the pirates is the fact that the entire world condemns their behavior, so the world is united in its desire to stop it. The most recent hostage situation involves an American captain and, for the first time, a US ship. This may have been a mistake by the pirates. The US tends to be less accommodating than many other nations when it comes to dealing with demands for ransom. The way these hijackings have out of nowhere grown into a recurring problem is reminiscent of the bombings and beheadings in Iraq earlier this decade. There was a period for each of these, where they were happening on a regular basis. It wasn’t clear how the rate of such atrocities would be slowed, but they were, and now we rarely hear about them.
This manager commentary 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. This information should not be relied upon by the reader as research or investment advice.
Past performance is no guarantee of future results. The S&P 500 Index is a market-value weighted index consisting of 500 stocks chosen for market size, liquidity, and industry group representation, with each stock’s weight in the index proportionate to its market value. You cannot invest directly in an index.