The Quater In Review -- First Quarter 2009
THE QUARTER IN REVIEW
By Marjorie L. Fox, JD, CFP®, AIF®
2008 Redux….The first quarter of 2009 looked reminiscent of 2008. The fixed income asset classes continued to provide stability, and the equity asset classes declined. A rebound in March was not enough to make up for the battering in January and February.
U.S. large cap equities, as measured by the S&P 500 index, surged almost 9% in March - their best one-month gain in more than six years - yet finished the first quarter with an 11% loss for their sixth consecutive quarterly decline. The index last fell six consecutive quarters in the period that ended in the second quarter of 1970.
The results for international large cap equities, as measured by the MSCI EAFE index, were similar to what we saw at home. REITs were pummeled as investors reacted to deteriorating fundamentals and fears about debt rollover. And, although March produced their first monthly gain since June 2008, commodities declined in the first quarter.
The Lost Decade? Yes and No….The Credit Suisse Global Investment Returns Yearbook is a comprehensive and authoritative analysis of total returns of 17 stock and bond markets around the world since 1900. In the 2009 Yearbook, authors Elroy Dimson, Paul March and Mike Staunton of the London Business School point out that this decade has been the lost decade for equity investors. Since 2000, stock markets in all 17 countries have declined.
Nevertheless, there is more to the story for those whose portfolios incorporate small company stocks, real estate and commodities. Although returns from December 31, 1999 through March 31, 2009 were negative for U.S. and international large caps (-32.7% and -36.9%, respectively), returns for other equity asset classes were positive: U.S. small caps: +15.4%; international small caps: +24.4%; REITs: +63.9%; and commodities: +56.2%. FJY clients have benefited from owning these equity asset classes.
The Longer View….In the 2009 Yearbook, Prof. Dimson and his colleagues provide a helpful perspective for the equity asset classes that have declined since 2000 - both U.S. and international large company stocks. Since 1900, global equities have delivered real (after inflation) returns of about 5% a year; and the real return was positive in all 17 countries.
Other commentators have been looking back at the 90s in Japan, and the 30s, 50s and 70s in the U.S. to provide a perspective on the markets and the economy. Journalist Jason Zweig, who referenced the 2009 Yearbook in a recent column (Wall Street Journal,, February 26, 2009), noted that the mood today is reminiscent of the 1950s, albeit for different reasons. In 1950, Cold War pessimism was the order of the day, and many doubted whether humanity itself would survive the years to come. But, progress prevailed; global stock markets gained 9% a year, adjusted for inflation, over the next five decades.
Of course, none of us has a 100-year time horizon and many of us do not have a 50-year time horizon, so we can’t help but focus on prospects for equities in the upcoming months, years, and decades, rather than centuries or half-centuries.
Looking Ahead….As this newsletter goes to print, stocks, since hitting a 12-year low on March 9, have risen significantly, including the best four-week run up for the S&P since 1933. So, where do we go from here?
There have been two other 12-year lows in the last 80 years: in 1932, during the Great Depression, and in 1974, in the aftermath of the Watergate scandal and the Arab oil embargo. These lows gave way almost immediately to long bull markets.
No one can know for certain whether we will look back on March 9, 2009 as the bottom. Maybe we will, maybe we won’t. But we will look back at a bottom at some point, because bear markets do end. The only way to participate in the rebound of the equity asset classes is to own the equity asset classes.