January 2009 Update
Market Recap
2008 proved to be one of the worst stock market corrections since the Great Depression. All major stock indices were down substantially for the year. The US economy continued to worsen during the fourth quarter, as unemployment fears and declining home prices weighed on consumer confidence and spending. The banking crisis continues, as the US Federal Government determines how to deal with the crisis effectively.
Investors have experienced increased risk and volatility associated with owning individual equity shares during 2008. Several safe haven investments, such as Bank of America and General Electric, have proven to be disastrous for shareholders over the past year, losing 57% and 68% of their value respectively. For investors seeking to improve returns, broad based diversification across all asset classes is more important than ever.
The Numbers
The S&P 500 index declined 565 points or 38.5% in 2008.
The Russell 2000 index declined 267 points or 34.8% in 2008.
The Nasdaq Composite declined 1075 points or 40.5% in 2008.
Index 12/31/08 9/30/08 QTR %Chg YTD%Chg
S&P 500 903.25 1164.74 -22.5 -38.5
Russell 2000 499.45 679.58 -26.5 -34.8
Nasdaq Composite 1577.03 2091.88 -24.6 -40.5
US Treasuries have proven to be the only safe haven for investors during the fourth quarter, as interest rates continue their downward trend.
Yield 12/31/08 10/31/08 QTR Chg YTD Chg
1 Yr Treasury 0.27% 0.94% -0.67% -2.90%
5 Yr Treasury 1.55% 2.80% -1.25% -1.73%
10 Yr Treasury 2.25% 4.01% -1.76% -1.66%
In our view, US Treasury yields appear to be bottoming out and should stabilize throughout 2009.
Summary
There are several things we can learn from 2008:
1. First and most important, do not exceed your risk tolerance when investing. It is important to know how much risk you can tolerate when investing, while keeping a keen eye on your investment time horizon.
2. The 2008 market decline was the worst correction ever experienced by most investors. This may prove to be a once in a lifetime event, and now is not the time to pull money out of the stock market. Remember, it takes a 100% gain to recoup a 50% loss. At current interest rate levels, you can never recover losses incurred in 2008 by being out of the market.
3. Fear has driven the market lower. History tells us that the best time to invest is when fear is high. Use this market correction to dollar cost average. That’s right, now is the time to move money out of cash and into broad based ETFs and index funds.
4. Remember that unemployment is a lagging indicator. It’s important to note, that while 2008 proved to be very difficult, the market will recover before unemployment improves. Again, history shows this repeatedly, time after time.
5. Finally, with the market volatility of 2008, remember to rebalance your portfolio. Rebalancing is key to successful portfolio management. It’s important to maintain proper asset class allocations to avoid portfolio style drift.
While corporate earnings may face many challenges during 2009, we believe that several things will impact the market favorably by the second half of the year. Monetary policy, through lower interest rates, will help stimulate the economy by lowering borrowing costs for businesses and consumers. Fiscal policy, through the new administration’s stimulus bill, should help economic growth. Short term spending programs and tax cuts should help create jobs. Additionally, corporate profits and consumer spending should get a boost from lower oil prices and energy costs. Mueller Asset Management believes that equity investments will outperform fixed income investments for 2009.