April 20, 2009

Insights from Atlanta Financial Planner Matt Hudgins specializing in Atlanta Financial Planning in Atlanta

Equities were down once again for the quarter. The S&P 500 Index fell just over 11% & internationals (MSCI EAFE Index) were down 14+%. That being said, we’ve had a very nice rally off the March 9th lows – through mid-April, we’re up 20+% off the lows. This reminds me of a Leuthold report: in the Dow’s 22 “BULL” markets since 1900, price gains in the first three months after the “bottom” have averaged more than 18% – One year after a bear market low, the average gains are 46%. No guarantees, but worth noting.

The recent rally in stocks has been sharply coupled with a sense that the global recession may be moving past its worst points. Again, the market is always looking ahead; so we don’t need to be IN the bottom, just able to SEE it ahead of us. Lower mortgage rates, a rapid growth of money supply, & of course, widespread monetary & fiscal policy initiatives have all helped to produce some signs of improved economic performance. None of this means that the global economy has bottomed, but it does perhaps indicate that “visibility” has improved & is likely to continue to improve.

A report I’ve mentioned before, according to Strategas, a look at the unemployment rate cycles over the last 60 yrs reveals that stocks tend bottom an average of 10 months before the peak in the unemployment rate. So, unemployment is 8.5% now; the pundits best estimate is unemployment peaking (maybe @ 10+%) in late ’09 / earl ’10. In short, it might be too early to run a victory lap, but another sign to watch.

We still see a number of risks throughout the economy & are particularly concerned about the upcoming “stress tests” on the banks – don’t expect any pleasant surprises. The media will only pick up on the “negative” results – again their job is to sell advertising, not tell us how to invest. On balance, we believe that the world economy should stop contracting in the mid / late part of this year.

Given the massive policy responses in the United States, many investors are troubled about the potential inflationary ramifications. At present, we would point out that deflationary forces are still stronger than inflationary ones. Deflation is both an economic & emotional issue, which is much more difficult to conquer. You & I keep putting off purchases as we wait for those car / flat screen TV prices to fall even more next month. Another note about recovery – our demand has not gone away, just postponed. When we’re “confident” those purchase will return in force.

Looking ahead, while interest rates & inflation are likely to rise when the economy recovers from recession, we do not expect inflation to become a significant issue & think it is highly unlikely that interest rates would return to the inflation-driven highs of the 1970s or 1980s. Inflation is something we know how to tackle – tighten the money supply (much easier to deal with than Deflation).

We are now at the start of the first-quarter earnings season, & there is near universal agreement that earnings growth will be considerably negative. The market response to earnings reports should help provide a clue as to whether the current rally will be extended. The bears are looking for negative reports to prompt some selling, while the bulls are expecting the markets to remain resilient in the face of negative news (market shaking off bad news – always a good sign of a bottoming process).

With hindsight, we can point to several important divergences between the current rally & the previously failed rally attempts. From a technical perspective, the current rally has been marked by strong momentum & expanding volume on the upside, & diminishing momentum & volume on the downside. This was not the case in earlier rallies & suggests a stronger base for the markets. Additionally, more cyclical areas of the market (discretionary & technology sectors) have been outperforming. Likewise, “emerging markets” have been posting better performance than developed ones. Both of these trends tend to occur when recoveries begin (people willing to take more risk by investing in these assets). Finally, market sentiment has also changed over the past month. Earlier in the year, selling was driven in large part by all the uncertainty (nationalize banks??). These factors have changed noticeably over the last month, which has provided a jolt to investor confidence.

Looking ahead, we expect volatility will persist & it would be premature to suggest that we will not encounter additional selling squalls in the months ahead. Our overall view is that while markets are certainly not out of the woods, equities should continue to move higher over the course of the year.

We believe the current crisis isn’t so different that it requires abandoning time-tested investment principles. Making investment decisions based on emotions created by short-term market volatility isn’t likely to help you reach your goals. Instead, focus on the future, and we’ll take the following actions to help position your portfolio for an eventual turnaround in the markets: Focus on the 3-Rs: Reassess your risk tolerance; Rebalance your portfolio; & Review your longer-term financial plan.

On another note, we are heartened and energized by your introductions to our firm. Now, more than ever, it’s important to do things the right way, and we’re committed to helping all of our clients, old and new, achieve their financial objectives. I predict that you’ll run into someone in the next month talking about money. Please, tell them “I know someone you need to meet & get a 2nd opinion.”
Also, we’re in the process of changing our website. Adding some new features, include the web-cam I’ve been using.
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