Last week brought a collective sigh of relief from investors all across the globe. You could just feel the tension escaping into outer space, where no doubt, everyone would prefer it stays.
Stocks turned in their best week since last November, and over the four day period of Tuesday through Friday, the Dow Jones Industrials leaped 597 points, while the S&P 500 jumped 11%.
The catalyst was just about the most unexpected news possible, given the steady drumbeat of gloom and predictions of chaos and doom about the nation’s banks. Citigroup, possibly the bank with the most contaminated portfolio of toxic assets this side of Chernobyl, reported that they had made their best profit since 1997 over the first two months of the year. Soon afterward, J P Morgan and Bank of America said they were also profitable.
Whoa! Profitable you say? What happened to all the conventional wisdom about the banks being zombies (the walking dead) with nationalization expected at any moment?
We also got further signs of stability in the economy. As reported here (and just about no place else), retail sales rose in January. The preliminary number released in February showed a 1.0% increase for January. But last week, that figure was adjusted upward to + 1.8%. And in February, they declined a tiny 0.1%. Excluding autos, retails sales actually rose 0.7% in February. So it looks like consumers aren’t cutting back as much as had been predicted by the experts, and are actually stabilizing.
And company inventories are continuing to be drawn down, which means that we are getting closer to companies having to ramp up factory production soon. And there are signs of rising sales in the semiconductor industry, considered by many to be a good leading indicator of technology spending.
There are other hopeful signs that the industrial economy is nearing a bottom. Prices for industrial metals are rising. Copper is up almost 9% this month and 19% this year. Among Wall Streeters, copper is sometimes known as “Dr. Copper”—the metal with a PhD in economics—because its prices are believed to signal turning points in the global economy.
Scrap steel prices have also been moving up, pointing to greater demand for raw materials among manufacturers. Also, some freight rates have been rising. The so-called Baltic Dry Index, a measure of global shipping rates tha is very sensitive to demand for moving goods around the world in ships, is rising. This index collapsed last year, but this year it has almost tripled. And some trucking firms have reported that business is picking up.
Oil prices are up about 25% in the last month, and now, finally, the stock market has made a significant and surprising jump.
Could this just be another “dead cat bounce” in a vicious bear market? Absolutely. But the important thing I hope you will take away from this last week is how quickly market sentiment can change, and how the very same “experts” that last Monday were predicting a 5000 Dow were suddenly and confidently predicting that the market could rally all the way through the summer. Huh?
Folks, the press and media are full of people just like you and I, who can suffer from severe emotional swings which unfortunately impact how they write and report the news. And what typically happens is that the same stories get circulated around and around all over the globe, and people believe them because they’re in the papers, on the Internet and TV, and eventually everyone comes to see them as a fact. They forget that they are not facts, but beliefs, usually based on flawed interpretations of facts and patterns that are seen. So we see several months of declines in stocks, auto sales, and consumer spending and everyone assumes we are going into a depression.
When I was a kid, I used to love watching the underwater adventures of Jacques Costeau. They always showed these huge schools of fish that would be swimming together in a very tight knot. The entire knot of fish would turn together on a dime and swim left, then turn instantly again in a different direction. Over my decades observing the markets, I have always marveled at how similar investors are to those stupid fish, all turning in the same direction together, as if they didn’t have a brain of their own. Extended periods of extreme greed, followed by extended periods of fear and panic. Each time they think the current situation is going to go on FOREVER, unbroken. They seem to say, “Don’t confuse me with reality, can’t you see that we are ALL panicking (or getting filthy rich) right now?”
With respect to the current market rally, please don’t stake your future emotional or financial well-being on how this turns out. No matter how crucial it may feel at the moment, it is not that important if we drop back down and go lower for a while longer. The important thing I hope you get out of this week is to really know and understand in your gut that eventually the market rally WILL be the real thing (it may even be the real thing now), that spring always follow winter and bull markets always follow bear markets. It has always been thus and will continue to be so in the future.
Also, did you notice how unexpectedly and forcefully the markets can rally when it wants to, even when nobody can see it coming and things still look awful? That is why we keep advising you to stay invested. You do not want to miss out on the initial innings of bull markets when they break out. And you just cannot predict when they will.
How would you have felt now if you had thrown in the towel last Monday when the Dow was down in the 6500 range? When you own stocks, you just have to keep your focus on three to five years into the future, NOT on next week or next month. And a couple of weeks ago, I hope I demonstrated conclusively with those graphs and charts I sent that the odds are overwhelming that the markets could easily double in the next three to five years, based on all times in the past when the markets have declined by similar amounts as now.
Now I’m going to ask you to read this article (below) from the Wall Street Journal this weekend. If it doesn’t convince you once and for all to completely ignore what the experts are saying today and what everyone else around you is doing, I just don’t know what will.
To me, this proves beyond any doubt the utter futility of trying to outsmart the markets, pick winning stocks, or select stocks to avoid. More often than not, you will get it wrong. And when you do get it right, it is almost always the result of pure dumb luck.
That’s why we don’t even bother to try. Instead we harness the power of the capital markets by letting them work for us. We diversify as widely as possible, because we recognize that nobody knows what is going to work the best over the next month, six months, or year. We hope after reading this article that you know it too.
In future updates, we will go deeper into explaining how our investment strategy works. We’ll explain the science it is based on instead of the forecasts, guesses, hunches, or market timing that the self-described experts use-strategies that all too often fail miserably. Read on:
Recall the Good Old Days of 1997:
By MARY PILON
Or Maybe Not…
Netscape: “They are so far ahead of Microsoft, and there’s no catching up.”
– Ron Scott, president and CEO of Nubian Management at Black Enterprise Conference, 10/1/96
AIG “will maintain conservative financial leverage”
– Standard & Poor’s 12/24/97
Circuit City” “an industry standout” with “long-term growth prospects”
– Institutional Investor, 10/1/96 (Circuit city went bankrupt last month)
Pets.com: “one of the most ambitious on-line commercial pet sites to date”
– Chicago Tribune, 11/16/98 (this dot.com IPO went bankrupt soon afterward)
“Newspaper stocks finally took off last year amid the prospect of lower newsprint costs”
– Institutional Investor, 10/1/96 (newspapers are going under at an alarming rate today)
The last time the Dow Jones Industrial Average was bouncing around its current neighborhood, the Hale-Bopp comet came close to earth, Bill Clinton was inaugurated for his second term and “Titanic” hit movie theaters.
Barron's proclaimed the Dow “unsinkable” in 1997. The investment world was completely different than that of today, with giant companies and start-up “dot coms” helping to push the stock market toward its zenith in 2000. Although much has changed since then, the Dow is right back where it was in 1997.
“Bubbles are awfully fun when they're inflating,” says Paul Larson, equity strategist at investment research firm Morningstar. “But they're not so fun after they burst. That's the world we're in today.”
Investing in the late 1990s, right before the tech bubble combusted, seemed easy — and it was. Consumer confidence was at a 30-year high. Job reports were “blissful” and drove up the Dow.
The term “investment utopia” was not uncommon in investing literature. Investors who put money into a stock index fund at the start of 1996, would have made 21% by the year's end. Investors who did the same thing in 2008 would have lost 38%.
Fund managers faced a completely different problem then — keeping up with a raging bull market. “Cheap stocks are heading for, if not extinction, at least endangered-species status,” lamented Barron's in January of 1997. When the market rose 30%, furious investors bailed out of funds that “only” gained 20%.
Contrast those managers with today's. In 2008, Thomas H. Forester was the only stock mutual-fund manager among 8,200 to post a gain for the year. While most funds lost 39% on average, Mr. Forester posted a 0.4% gain. By 1997 standards, he'd be a failure. In today's market, he's heralded as a hero.
Opinions about what stocks to invest in have also shifted. Many investors back then turned to stocks related to the new world of dial-up modems, CD-ROM drive manufacturers and strange businesses with “.com” attached to their names.
Value was seen in companies like Pets.com, Netscape and Qualcomm. But perhaps one of the biggest gainers in the era was Microsoft, with shares surging close to $60 a share by late 1999. “Buy [tech stocks] and boast,” said Barron's in September 1996.
Today, Microsoft trades around $15. In January, it said it would slash 5,000 jobs, roughly 5% of its work force.
But not everyone surfed the Internet wave. Others opted for companies that seemed destined to remain part of the American business bedrock — financial-services stocks. “We're overweighted in financials,” said Barbara Boles, president and CEO of the Kenwood Group at the end of 1996. “I just love banks.”
Financials were among the best performers then. Now, they're at the heart of the global economic collapse.
“The financials are a nightmare,” Benedict P. Willis with VDM Institutional Brokerage said on the New York Stock Exchange trading floor last week. “They're a psychological impediment to the rest of the market.”
Also hot then: luxury retail. Sales of yachts, BMWs and high-end jewelry surged. Sales of Lexus autos jumped 40% in 1997.
“[Brokers] are spenders,” Robert Healey, chairman of Biking Yacht Co. in New Gretna, N.J., told the Christian Science Monitor in August 1997. “These are not the kind of guys who stick their money in the bank. They want to enjoy life.” Investors gobbled up shares of luxury labels like Saks, Tiffany and mid-priced jeweler Zale.
Today, luxury retailers are struggling. Shares of Saks have dropped under $2, Tiffany is under $20. Zale is around $1 and referred to as a “zombie stock.”
In 1997, big retail was also the rage. Sears was one of the Dow's top gainers in the mid-nineties. Circuit City — which filed for bankruptcy and closed its doors last week — was an “industry standout” for 1997, according to Institutional Investor.
“Back then,” says Mr. Larson of Morningstar, “they were sayin, ‘I should expect my portfolio to double every couple of years' and that was clearly far too optimistic. Likewise today, people expect the market to do nothing but to go down and spiral into nothing. But I think that's far too pessimistic. You couldn't extrapolate the past then, and I don't think you can today.”
Are you looking for life-long financial planning support beyond traditional wealth management? Then Del Monte Group is the right place for you. At DMG, we address a client’s entire lifestyle to help make all goals become a reality–even if they aren’t directly related to money. Our clients are more than just assets and investments. They are human beings with their own stories, and they are our family. So, when you’re in the greater Alamo or Danville, California area our door is always open to assist you in person Call us at 925.736.6410, send an email to Info@APlaceOfPossibility.com, visit APlaceOfPossibility.com/Calendar to get your meeting on the books. We can't wait to help you.