April 7, 2009
Introduction
If losing less reduces market fears, we should all feel a little braver today than we did three months ago. Following 20%+ losses in the fourth quarter of 2008, 2009 started with “only” a 10% loss in the first quarter. Foreign markets fared a little better with an 8% loss in the quarter. The really good news, however, came in the last month of the quarter, when U.S markets rallied 9% and foreign markets returned 7.5%, including a 2% positive currency effect.
I will review first quarter stock market performance around the world. Then I’ll turn our attention to the past decade, to understand what has happened and how we can deal with it. Then we look at a measure of fear to see if we can find a glimmer of hope. Finally, I offer some suggestions for fixing a few things that have been broken for quite awhile.
The first quarter of 2009
As the next chart shows, every US style lost in the first quarter. Mid-cap growth defended best, losing only 5%, while large and small value companies suffered most, losing 13%. Overall, growth companies lost least, which is somewhat of a surprise in a declining market. I use Surz Styles and Country indexes throughout this commentary, as described here.
The real message continues to be market volatility, which is displayed graphically by sector in the next exhibit. The floating bars show the distribution of possible portfolio returns when selecting stocks from the indicated sector. This is not the range of stock returns; rather, it’s the range of portfolio returns, using a simulation approach described at PODS. For example, a really good result for a Materials sector portfolio is a positive 17%, which is the one-in-twenty (5th percentile) best portfolio return. By contrast, a really bad return in Materials is -17%. This spread of 34% indicates the wide range of risk and opportunities in this sector. The last row in the exhibit reports the ranges from the 5th to the 95th percentiles for each sector. A more typical range in a single quarter is about half that experienced in the first quarter of 2009.
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