A year ago we wrote that the aftershocks of the credit crisis
would determine the course of the global economy and investor
sentiment in 2008. Little did we imagine that the aftershocks
would tumble many of the world’s most prominent financial
institutions and force the global financial system to delever. The
resulting performance of the broad stock market indices was a
vivid reminder of the old Wall Street adage: “The revenge of the
margin clerk is swift and brutal.”
Our ability to navigate through this environment was made
somewhat easier by the fact that most of our clients’ portfolios
were conservatively positioned prior to the downturn.
Nonetheless, the severity of the downturn and the prospect of a
slow recovery have caused us to make several adjustments to our
portfolio strategy:
- We have reconfirmed that clients have adequate cash balances
to meet their spending needs in the year ahead. This is a
precautionary measure to reduce the need for additional stock
sales during this period of depressed prices.
- The continued turmoil
in the credit markets
has created a situation
where investment-grade
corporate and municipal
bonds now offer a risk/
return profile that is more
attractive than stocks. This is based on our belief that the bond
market must normalize before the outlook for stocks improves.
Until this occurs, we are allocating more assets to bonds.
- We continue to dollar-cost average into new stock positions,
but are doing so in smaller increments. This is our way of
balancing the opportunity of low stock prices with the risk of a
prolonged global slowdown.
Outlook
Investing is often an exercise in patience, and the past year has
given investors a strenuous workout. The fact that investors
continue to purchase Treasury bills – which now offer only a
return of capital instead of a return on capital – suggests that
investors are simply worn out.
We don’t know when
this situation will
begin to reverse itself,
but there are several
short-term factors that
might help. First, over
the next few months,
the economy should
begin to feel the full
impact of the various
monetary and fiscal
measures that have
been enacted. Second,
lower commodity costs
should benefit the
consumer and improve
corporate profitability.
Third, a few successful
corporate bond
offerings early in the
New Year could encourage investors to move a portion of their
large cash balances into something other than Treasuries.
There are also a number of powerful secular trends that remain
in place. Global living standards continue to rise as millions
of people each year are gaining access to some combination
of indoor plumbing, electricity and improved nutrition. The
opportunity for companies able to meet these basic needs is
enormous.
Despite the recent decline in oil prices, the need for alternative
energy sources has become widely recognized and accepted.
Creating the infrastructure to provide the world with new energy
supplies will bolster global growth rates and help address many
of today’s environmental concerns.
We close with a comment from Secretary of State Condoleezza
Rice, who recently remarked, “One of the great things about
representing this country is it continues to surprise; it continues
to renew itself; it continues to beat all odds and expectations.”
A year from now, we suspect that investors may say the same
thing about the financial markets.
(c) Chess Financial
www.chessfinancial.com |
