We are in a bear market caused by the excess in residential real estate, the deleveraging of the global financial system and a major credit crunch. But the issue we are faced with today is shortage of confidence, not shortage of capital.
Seeing the news headlines, clearly people are frightened. However, it is important not to ignore the good news drowned out by the juicy headlines that sell newspapers and garner ratings. To get some perspective on recent events, here are some facts that do not receive prominent exposure on the news:
• The U.S. dollar is getting meaningfully stronger vs. most currencies, especially the Euro
• Oil is off more than 50% from its peak
• Commodities prices are sharply declining
• The Consumer Price Index (CPI) had its first decline in almost two years
• Our Exports are growing
• Unemployment is near its 60 year average
• The Federal Government is engaged in an unprecedented effort to inject liquidity, provide relief and restore confidence in our financial system
• Cash (savings accounts, CD's, and money market funds) on the sidelines is at a 15 year high, much of which will likely return to the market once confidence is restored
History shows that market crises are inevitable. But painful as they may be, they are ultimately surmountable. Our capital markets are resilient. Markets overshoot occasionally, but surviving companies emerge much stronger. The U.S. economy has grown over every decade in the last century, and the market generated double-digit returns despite numerous bear markets, recessions, stock market crashes, two world wars and several other wars, the September 11th attacks, a major oil crisis, double-digit interest rates, rampant inflation, high unemployment, political scandals, the resignation of a president and the assassination or death of several presidents, and much more. I believe this time is not different in that investors focused on long-term objectives will be rewarded for their patience.
Stocks cannot be cheap and popular at the same time. A basic rule of investing is to buy them when they are unpopular and selling at bargain prices. An environment like the current one, where so many stocks in every sector are on fire sale, does not occur often and typically does not last very long (even though it can feel like an eternity while going through it).
For the market to go up from here, the news doesn't have to be good. It just has to be not as bad than what people currently expect.
• The peak-to-trough decline in the Dow Jones Industrial Average is the second worst since the Great Depression
• The volatility of the S&P 500 is at record levels (historically a reliable predictor of bottoms)
• The Dow is 30% below its 200-day moving average, the widest spread since November 1937
• The S&P 500's dividend yield is now above the yield on 10-year Treasury notes for the first time since 1958
• Stocks are now valued at 59% of GDP, well below their long term average of 79%
Warren Buffett understands asset values and market behavior better than anyone. In 1974, at the time the worst bear market since the 1930s, he wrote a now famous Forbes article and said the time was right to buy stocks. It turned out to be the best buying opportunity in a generation. In 1999, he warned that prices were very high and future rates of return are likely to be sub-normal. And indeed, the trailing 10-year return on stocks is now negative. Mr. Buffett wrote an op-ed piece for the New York Times about a month ago, in which he said values are compelling and advised buying US stocks.
We at Wellcap partners have been listening. You should, too.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.