IN THIS ISSUE:
- "The 2008 market will go down in history"
- "2008: We Learned What We Don't Know"
- Happy New Year!!
Happy Holidays! I hope that everyone who celebrated Christmas had a very merry one. We certainly did at the Halbert house. I am taking this week off to spend time with my son who is home from college. I will be back to my usual writing schedule next week.
As we close out 2008 tomorrow, I thought it might be good to look back at some of the unusual and unprecedented events that occurred this year. Accordingly, I have reprinted a very good article from MarketWatch that chronicles what happened in the investment markets and the economy this year.
Whenever unprecedented events occur, and we have seen many this year, there is always the question of whether we have learned from those experiences. On that note, I have also reprinted a very good article from economics and business writer Robert J. Samuelson on that very subject. I think you will find it very interesting.
The 2008 market will go down in history
By Nick Godt
NEW YORK (MarketWatch) -- Investors lost trillions of dollars and U.S. stocks prices plunged to 11-year lows. Overseas markets suffered even worse declines.
Yet, to say that the 2008 market will go down in the history books might almost sound like whistling past the graveyard. As the U.S. and the global economies continue to worsen, investors are still licking their wounds and worrying about 2009.
Looking back to expectations at the start of the year, "the surprise was not that we had a bear market and a recession," said Hugh Johnson, chairman of Johnson Illington Advisors.
"The surprise was that events were as severe as they turned out," said the veteran adviser, who has over 40 years experience in the investment world. "I have been at this for a while and I've never experienced anything like this. It defies words to describe it."
What can be said is that many things that sounded impossible at the start of the year now have to be accepted as facts.
After its astonishing surge to nearly $150 a barrel this summer, oil now trades near $40. The market capitalization of General Motors is now lower than it was in 1927. Bear Stearns and Lehman Brothers are no more. In October, a 900-point swing in the Dow industrials became almost commonplace.
"I'd like to use the old roller-coaster ride comparison," said Paul Nolte, director of investments at Hinsdale Associates. "But it's been more like a one-way trip down the haunted house."
In a way, it didn't matter that many market strategists and commentators often struggled for the right metaphor to describe the market. The numbers flashing on TV and computer screens across the globe often spoke, and continue to speak, for themselves.
As of Dec. 12, the Standard & Poor's 500 index had lost $6.17 trillion since hitting record highs in Oct. 2007.
That reduction in global stock wealth has outstripped the losses in the last bear market - the S&P 500 lost $5.76 trillion during the entire bear market of 2000-2002. Making matters worse, this one still has room to run.
By Thanksgiving, many individual investors discovered they would have been better off sticking their savings under their mattress rather than the stock market for the past decade.
On Nov. 20, the S&P crashed through the previous bear-market low of 776, made in October of 2002, to end its lowest close since April 1997.
The U.S. showed it hadn't lost its superpower qualities, as a home-grown housing bust and mortgage crisis spiraled into a global market collapse.
The S&P Broad-Market index, which blends more than 11,000 stocks from developed and emerging markets, has lost $17.7 trillion year to date. Most of the losses, or $16.1 trillion, were logged between May and December.
"Until May, global markets were still expected to grow faster than the U.S., as China was seen growing more than 10%," said Howard Silverblatt, index analyst at S&P.
That optimism evaporated as the credit crisis spread around the globe and the U.S. recession clipped the outlook for global growth.
In November, the World Bank said China's economy is likely to expand at a 7.5% rate in 2009, its slowest pace since 1990.
Once leaders in emerging markets, stocks in Russia have now plunged 72%, those in Turkey are off 68%, and those in India have fallen 67%.
In October, Japan's Nikkei 225 hit a 26-year closing low; Iceland's exchange tumbled 81%, while Brazil's Bovespa index slumped 25%, its biggest one-month percentage loss in 10 years.
At times earlier in the year, it looked like investors were going to get a break. After the near-collapse and subsequent bailout of 58-year old investment firm Bear Stearns in March, markets found some degree of stability and even gained back some ground until May.
But as more Wall Street institutions crumbled, all beset by investments linked to bad home loans, fresh selling bruised stocks. After Lehman Brothers went bankrupt late in September, one of a string of large financial failures and government bail-outs that month, stock markets set multidecade records for lows reached and big swings registered.
In October, the S&P 500 had its most volatile month since 1929, right after the stock market crash that preceded the onset of the Great Depression.
The Dow plunged to its worst point drop on record, down 777 points, on Sept.29. By Oct. 15, the index had registered 508- to 733-point drops in three separate session.
The index also proceeded to surge to its biggest point gain on record, up 936 points, on Oct. 13. According to S&P, over the past 60 trading sessions alone, there were 17 days where stocks moved up or down by at least 5%. To put this in perspective, there had only been 17 days of 5% or more swings over an entire 53-year period, between 1955 and 2008.
Between Oct. 27 and Nov. 4, the day of U.S. Presidential election, stocks on the S&P surged more than 18%. But between Nov.4 and Nov. 20, they proceeded to slide 25%, before gaining more than 16% through Dec. 11.
"Playing those swings correctly, an investor could have made a 72% return," said S&P's Silverblatt.
Safe havens or 'money for nothing'
But most investors are unlikely to have tried playing the swings. Safety and preservation of capital became the name of the game for many.
The need to protect one's savings became so pressing that on Dec. 9, the government sold 4-week Treasury bills at a yield of 0%, meaning that bond investors were happy to just have the principal they'd lent back to them without a loss.
The yields on other government bonds, considered the safest among all investment classes, also reached lows unseen since the government began keeping records in the 1950s.
While investors opened their wallets to the U.S. government, they lent very little to anyone else. Commercial paper markets froze after the Lehman collapse, threatening to put out of business anything from big banks to small firms dependent on short-term loans. Borrowing costs for companies surged.
Even banks became increasingly unwilling to lend to each other, as more took huge write-downs from bad assets. The London interbank offered rate, or Libor, soared to record highs near 7% after Congress first rejected a $700 billion bailout for financial firms.
Oil's wild ride
Until July, the one sure bet for the nervous investor had been commodities. Hopes for global growth, along with a combination of natural disasters, geopolitical tensions, a sliding dollar and market speculation, had led energy and food prices to rocket, causing severe food shortages in poorer countries.
It was a shock when oil surpassed $100 a barrel in January. But those prices looked cheap as the futures contracts skyrocketed to $147 a barrel by July.
That level turned out to be commodity's swan song. It has plunged to trade around $40 a barrel in December, a swift descent echoed by other commodities.
"The rise in oil to $147 per barrel and its subsequent decline to $40 was vicious volatility," said Hugh Johnson. "It defies words to describe it. It certainly made life tough for the year."
Goldman Sachs analysts, who were laughed at back in 2005 when they first suggested oil might reach $100 in a "super spike," now predict oil could fall back to $30 a barrel in the coming months.
Gold also hit a record high above $1,000 an ounce in March, before slumping back below $700. The precious metal, however, has managed to crawl back to trade above $800 an ounce as investors seek safe-haven assets.
Besides oil, food stuffs such as corn also first reached record highs above $6.5 a bushel in June, before sliding back under $4 a bushel amid fears of a global recession.
A surge in the dollar helped precipitate the collapse of commodities. The dollar halted its four-year slide around May and proceeded to rally against most of its counterparts as financial and economic concerns spread globally, turning the U.S. currency into a safe-haven play, along with the Japanese yen.
The U.S. currency jumped 13% against a basket of six major counterparts over the course of the year so far.
Dramatic and record-setting swings in nearly every sector of security have sent professional investors thumbing through the record books.
"Nothing compares with the crisis that we have faced," said Johnson of Johnson Illington Advisors. The U.S. stock rout already registers as the fourth-worst bear market since 1898, he said. "It's clearly historic."
Here's another anecdote of how market perceptions and reactions may have changed: With the Dow swinging within an 800 point range on Oct.24, there was little immediate market reaction when Alan Greenspan, the once-venerated former chairman of the Federal Reserve, admitted to making a mistake when he testified to Congress.
While every one of his utterances used to be parsed by analysts, few now reacted when Greenspan said his view of the world might not be right after all.
"Absolutely, precisely," Greenspan said. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."
The following article was published yesterday in the Washington Post, RealClearPolitics.com and elsewhere. Robert Samuelson eloquently points out how many longstanding assumptions were dashed in 2008, as his title suggests below.
2008: We Learned What We Don't Know
By Robert J. Samuelson
It's the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best. The great lesson of the past year is how little we understand and can control the economy. This ignorance has bred today's insecurity, which in turn is now a governing reality of the crisis.
Go back to the onset of the crisis in mid-2007. Who then thought that the federal government would rescue Citigroup or the insurance giant AIG; or that the Federal Reserve, striving to prevent a financial collapse, would pump out more than $1 trillion in new credit; or that Congress would allocate $700 billion to the Treasury for the same purpose; or that General Motors would flirt with bankruptcy?
In 2008, much conventional wisdom crashed.
It was once believed that the crisis of "subprime" mortgages -- loans to weaker borrowers -- would be limited, because these loans represent only 12 percent of all home mortgages. Even better, they were widely held, diluting losses to individual banks and investors.
Wrong. Subprime mortgage losses (20 percent are delinquent) triggered a full-blown financial crisis. Confidence evaporated, because subprime loans were embedded in complex securities whose values and ownership were hard to determine. Similar doubts afflicted other bonds. Demand for all these securities shriveled. Lenders hoarded cash and favored safe U.S. Treasuries. Because investment banks and others relied on short-term debt (a.k.a. "leverage"), a loss of confidence and credit threatened failure. Lehman Brothers failed. The financial system had overborrowed and underestimated risk.
It was once believed that American consumers could borrow and spend more, because higher home values and stock prices substituted for annual savings. Consider: From 1985 to 2005, the personal savings rate dropped from 9 percent of disposable income to almost zero. But over the same years, households' net worth (assets minus liabilities) quadrupled, from $14 trillion to $57 trillion.
Wrong. In recent years, consumers increasingly overborrowed, especially against inflated home values. With the housing "bubble" now collapsed, net worth is falling. Homeowners' equity in their homes -- the share not borrowed -- is at a record low of 45 percent, down from 59 percent in 2005. Consumers have responded by retrenching big-time. Retail sales have dropped for five straight months; vehicle sales are a third below 2006 levels.
It was once believed that the rest of the world would "decouple" from the United States. As Europe, Asia and Latin America expanded, their buying would cushion our recession. A better-balanced world would emerge, with smaller U.S. trade deficits and lower surpluses elsewhere.
Wrong.The crisis has gone global; economic growth in 2009 will be the lowest since at least 1980. Even China has slowed; steel output was down 12 percent in November from a year earlier. The crisis has spread through two channels: reduced money flows and reduced trade. Global financial markets are interconnected. Customer redemptions forced U.S. mutual funds and hedge funds to sell in emerging markets (such as Brazil or Korea), whose stocks have dropped about 60 percent from their peak. Credit has tightened, as money flowing into developing countries is expected to shrink 50 percent in 2009 from 2007 levels, estimates the World Bank. The bank expects trade, up 7.5 percent in 2007, to fall in 2009 for the first time since 1982.
So much that has happened was unexpected that the boom and bust's origins are obscured. These lie in the side effects of declining inflation that started in the 1980s and, in the process of reducing interest rates, boosted stock prices and housing values. Recall that in 1981, when inflation was 9 percent, 30-year mortgages averaged 15 percent. As rates fell (mortgages were 10 percent by 1990, 7 percent by 2001), home prices rose. People could afford more. With lower interest rates, stocks became more valuable.
All the bad habits of recent years -- excessive borrowing by consumers and money managers, careless and reckless lending -- grew in a climate when gains seemed ordained. Even after the "tech bubble" burst in 2000, stock prices at year-end 2002 were seven times their year-end 1981 level. Home prices increased steadily; in the 1990s, they rose 45 percent.
Prosperity, apparently forgiving of mistakes, bred the complacency that undid prosperity. On bad mortgages, losses could be recovered by selling the homes at higher values. Thus rationalized, bad loans were made. Some stocks might decline, but over time, most would rise. Risk seemed to recede, so investors and money managers undertook riskier strategies.
What will emerge from these shattered illusions? Will the crash stir social unrest, abroad if not here? Will Americans become so thrifty that they hamper recovery? Will economic nationalism surge? How will capitalism be reshaped? Much depends on whether the frantic policies to combat the recession succeed. Probably they will, but there are no guarantees. Our ignorance is humbling.
Happy New Year!!
2008 brought us some tough times, both in the markets and the economy. The credit crisis is still very serious, and the housing slump gets worse by the month. It is clear we are in a recession and we still don't have a good idea how long it will last or if it will get even worse. So, the outlook for 2009 is very uncertain.
Most of the trusted sources I read forecast that the recession will continue through at least the first half of 2009 and maybe longer. None of my best sources has a resolute opinion on whether we've seen the worst of the credit crisis or not. Ditto for the stock market outlook. So it remains to be seen what lies ahead. I don't remember a time of such economic and financial uncertainty in my lifetime.
Fortunately, America has survived serious recessions and financial crises in the past, and I have no doubt that we'll weather this one as well. How long it will take, unfortunately, is anyone's guess at this point. Of course, it never hurts to pray for our leaders, including our new president.
Wishing you a Happy & Profitable New Year,
Gary D. Halbert
Chronology of Major World Events in 2008 – Part One
Chronology of Major World Events in 2008 – Part Two
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Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.
12-31-2008 9:16 AM
Gary D. Halbert
Filed under: Gary D. Halbert, Housing Crisis, Credit Crisis, Subprime, Oil, 2008, Economy, Estate Planning, MarketWatch, Investor Losses, Nick Godt, Robert J. Samuelson