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Bear Market Recovery?
Print Version
October 2008
Dear Investor:
Since our regular
newsletter does not go out until the end of this month, we
thought it would be appropriate to give a brief update of the
financial markets in view of recent market conditions. We have
all witnessed one of the most volatile financial markets since
the early 20th century, although price declines have so far been
only of average bear market proportions.
In a series of unprecedented and aggressive
moves, the US Treasury, SEC, Federal Reserve and US Congress
have employed dramatic measures in an attempt to avoid greater
damage to the global markets to prevent an economic meltdown.
Legislation passed October 3rd will eventually begin to
alleviate some of the liquidity crisis so that businesses and
consumers can borrow money again. Meanwhile there will be no
assurance that the delay of this legislation has avoided a
serious recession risk or stock price adjustment.
Spectrum accounts have been only partially
invested throughout 2008 since we received our bear market
signal in January, so although we have modest losses for most of
our trading accounts, we have had a large portion of clients’
investments in a cash position. Where possible, these cash
positions are in the safety of US Government money market mutual
funds or the equivalent.
In spite of all the doom and gloom that is
being spread by the news media, this is just another bear market
that will eventually lead to the next bull market. The S&P is
now down over 35% from its peak last October. That is
about typical for a run-of-the-mill bear market so far, but no
one really knows how long this may continue. I think it is fair
to say that we are a lot closer to a buying opportunity than we
have seen for a long time, but do not want to be premature and
take excessive risk at this point in time. This does feel like
it has the potential of being a more severe bear market than
past ones, but will not be the financial Armageddon that many
would have you believe. As is the case for every bear market,
easy monetary policy, lower interest rates, and more attractive
stock valuations will set the stage for the next bull market to
follow—but only after most investors have become convinced that
they will lose everything. They will not.
In
order to take full advantage of the next bull market, it is
essential to get through this bear market with our capital
intact and in position to reenter the markets in a more
aggressive manner when the time is right. Experience has shown
us that people who cash out of the financial markets with their
long term investable capital will eventually put their funds
back to work at a much higher price, after the market turns up
for an extended period of time and they “feel good”.
Investing is not about feeling good, but about discipline, and
emotions are always wrong when it comes to investing.
The following illustrates recent bear markets
and recoveries shortly thereafter:
Year Bear
Market Decline S&P 500*
Subsequent Rally
1987
-35%
+23% in 1 ½ months
1990
-20%
+33% in 6 months
1998
-23%
+39% in 3 months
2003
-50%
+47% in 10 months
( +75% for Russell 2000)
2008
-35%
?
* Numbers obtained through Bloomberg
As
far as High Yield Bonds are concerned, I am about as excited as
ever on their potential coming out of this crisis. We have been
in the safety of a cash position watching them drop like bricks.
They currently pay 11% more than Government Bonds, nearing an
historic high, and when the credit crisis end is in sight, they
should be quite profitable. More about this will be written in
the month end newsletter.
Meanwhile
try to relax and leave the investing to us. The current crisis
will eventually prove to offer a great buying opportunity.
We encourage clients to stay the
course and possibly increase their investment dollars under
Spectrum’s management.
At Spectrum, we have proven that we
are able to navigate well through market times such as these.
By remaining in the safety of money
markets, we will be in a position to reallocate to investments
that are more aggressive when the appropriate conditions
warrant.
We have seen these kinds of markets
before, and will continue to deal with them in a responsible and
conservative manner.
Please call our office and find out
how you can help your friends, family, and others to safely
prepare for the next bull market.
Your Representative and our
Client Service Team are available to answer specific questions
regarding your portfolio and it is always appropriate for you to
call if you need more information about your investment.
Sincerely,
Ralph Doudera, CEO
Spectrum Financial Inc.
2940 N. Lynnhaven Road | Suite 200 | Virginia Beach, Virginia 23452
Tel: 757-463-7600
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