2008: A Year for the Record Books
Financial markets around the globe are still in holiday mode, meaning low volume and limited news flow. We suspect most investors, and certainly investment professionals, are enjoying the break. Unfortunately, real life will start again soon. With one trading day left, the major equity benchmarks are on track to post a fourth consecutive down month and their worst calendar-year decline since 1931. That year the S&P 500 was off -47% and the Dow fell -52%. Those losses would be recovered by the end of 1936 – a period of just five years. We can hope for a faster recovery this time, but most investors would probably welcome a five-year market recovery with open arms.
2008 was a year in which “good” performance meant “losing less” rather than posting gains. The smallest losses were found in Consumer Staples, Health Care, Small Cap Value, and Japan. At the other end of the scale, the worst losses were in Financials, Materials, Mid Cap Growth, and Pacific ex-Japan. There were a few bright spots in individual stocks, such as Wal-Mart (WMT), and the late-year bond rally allowed balanced portfolios to trim their losses. Nonetheless, very few investors managed to end the year unscathed.
Economic indicators are still looking grim. Today’s S&P/Case-Shiller home price index showed a broad-based national decline, with some of the heretofore stronger regions beginning to break down. Not coincidentally, the Consumer Confidence Index plunged to a record low, which helps explain why holiday shopping failed to save the day for retailers. It was the worst season in memory for most stores, which suffered from both lower sales and shrinking margins thanks to massive discounting. Unemployment remains stubbornly high and credit is still very tight, despite massive efforts by the Federal Reserve to stimulate lending. In the big picture, both lenders and borrowers are doing the right thing: banks need to restore their capital, while individuals need to rebuild their savings. Unfortunately, the short-term result is a deflationary economy in which everyone suffers. Whatever stimulus plan the Obama Administration enacts will be largely irrelevant.
There is a little bit of action in the commodity markets. Crude bounced back from recent lows as new violence broke out in the Middle East. Less noticed was a decision by China to add to its strategic oil reserves while prices are low. The broader energy trends still point down, so we would not get too excited just yet. Gold, on the other hand, is moving up very nicely and has resumed its long-term uptrend. Whether this is simply a reflection of dollar weakness or a discounting of future inflation is not entirely clear. In either case, gold is picking up momentum quickly and could move much higher in the coming weeks.
After posting several weeks of unprecedented gains, Treasury bonds are in steeply overbought territory. Does this mean a correction is inevitable? No. If yields simply stay flat for a few weeks, the overbought indicators will return to normal. The Federal Reserve appears determined to keep interest rates low, and we suspect that is exactly what will happen. One consequence of this is that investment-grade corporate bonds are starting to look attractive. We suspect some yield-hungry capital will begin to flow in that direction soon. Municipal bonds are still in the danger zone, though it will not be surprising to see the federal government come to the aid of some hard-hit states and localities.
There was little change in our sector rankings over the last week. Defensive sectors are still on top while Materials and Financials are at the bottom. The rally in energy, while impressive to see, was not enough to affect the intermediate-term momentum of the sector, which remains firmly negative.
Quiet holiday trading kept our style benchmarks mostly unchanged for the week. Small Value had been on the verge of overtaking Mega Cap on top of the chart but now appears to have lost some of its steam. It will be interesting to see how the January Effect plays out. The Large Cap categories are proving to be surprisingly strong on a relative basis.
Japan is now on top of the Global rankings, moving solidly ahead of China. This has as much to do with currencies as with strength (or lack thereof) in those two stock markets. The Yen has been amazingly strong against the dollar recently. Canada and Latin America are still at the bottom of the list.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“No one ever regarded the first of January with indifference. It is that from which all date their time, and count upon what is left. It is the nativity of our common Adam.”
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