The last several weeks have given us a truly epic, slow-motion crash in equity prices. Today's lows had the S&P 500 down by more than 45% from its intraday high of October, 2007. That's a mauling for the ages. Market participants aren't just upset about all of this; they aren't just scared by it. They're also in awe, looking on slack-jawed as each week brings more nuttiness than the last.
So, in the spirit of great art, we think it's time to present a few eye-popping charts, the constituent elements of the broad market's historic selloff. With recent intraday prices, and in no particular order:
Joy Global, down more than 76% from its 52-week high of $90.00:
Potash Corp. of Saskatchewan, down more than 72% from its 52-week high of $241.62:
John Deere, down more than 68% from its 52-week high of $94.89:
Continental Resources, down more than 74% from its 52-week high of 83.81:
CB Richard Ellis Group, down more than 82% from its 52-week high of 27.11:
U.S. Steel, down more than 82% from its 52-week high of $196.00:
Merrill Lynch, down more than 76% from its 52-week high of $68.18:
American Capital Strategies, down more than 75% from its 52-week high of $43.94:
We could go on, but you get the point.
One of the remarkable features of this wicked bear has been the near-total absence of places to hide, though a few prominent consumer staples names have held up better than the overall market. Coca-Cola: Down more than 36% from its 52-week high. Procter & Gamble: Down more than 21%. Clorox: Down more than 17%. Not pretty, but not quite as ugly as the material/energy/financial/industrial darlings-turned-villians.
Some great values have been created amid all this carnage. The challenge, as ever, is to identify where and when--and to do so before everyone else does.
Overheard a moment ago, from CNBC's Bill Griffeth:
On a day when we were expecting a horrible open this morning, didn't happen, and kind of holding steady with a decline of 325 points. That's holding steady! Believe it or not.
Er...our charts show a drop of 56 points in the S&P 500, more than six percent, in the first 15 minutes of trading. Even in these unhinged times, we're pretty sure that qualifies as a "horrible open." But perhaps these things are in the eye of the beholder. Either way, it ain't pretty out there.
In yesterday's Wall Street Journal, Tom Herman reminded us of one of our now-standard subjects: The woeful tax inefficiency of many open-end mutual funds. (See this April item for more from us on this problem.) Here's Herman's introductory take:
For most mutual-fund investors, it's been an abysmal year. The average U.S. diversified stock fund is down 33% through Monday, according to Morningstar Inc. Foreign stock funds have also posted steep declines, as have funds in most other categories.
And some investors may have to pay hefty tax bills on their losing funds anyway.
Much of Herman's advice is perfectly spot-on: Be aware of record and distribution dates, consider offsetting any gains with realized losses, &c. Our objection isn't with Herman. It's with the premise of using actively-managed open-end funds in taxable accounts in the first place. Here's a quotation from Greg Hinkle or T. Rowe Price:
"In markets with big daily moves, keep investment considerations foremost. If you stay out of a fund for one day to avoid a 5% distribution, but lose out on a 6% or 7% upward market move that day, you've lost ground."
Fair enough, but wouldn't it be much wiser still to participate in particular asset classes using vehicles that don't (generally, with vanishingly few important exceptions) suffer from these absurd tax implications? Consider the experience of the investor who unwittingly busy shares of the Oppenheimer Developing Markets fund, which Herman tells us will distribute roughly 20% of its net asset value in December. Ouch! Fund complex to investor: "Thanks for your $20,000 investment in our fund. Now, here's $4,000 of your money back. Capital gains taxes are due April 15th. Please consult your accountant."
Prudent taxable investors will consider establishing asset-class exposure with the obvious alternative: Inexpensive exchange-traded funds, which, due to their creation-redemption process, distribute vanishingly few (in fact, almost always no) capital gains.
With the publication of Warren Buffett's opinion piece in the New York Times, we'd like to revisit the question of selling equities into the maw of this growling bear. As we've written recently (here and here, for example), the big problem with selling at these levels is how and when investors would return to the market.
CNBC flashed a couple classic Buffett quotations this morning. This one is especially apt: "Those awaiting a 'better time' for equity investing are highly likely to maintain that posture until well into the next bull market." There's a basic, profound truth in this observation, one reflected in Dalbar's ongoing work on investor returns falling short of market returns (and short oftheir own funds' returns).
The issues here are straight out of behavioral finance: Loss aversion, regret avoidance, euphoria, despair.
Our general suggestion is that investors not liquidate at these levels. And those who have cash available, regardless of whether they've held that cash through the downdraft or raised it more recently, should establish a clear discipline for reinvesting it consistent with their risk acceptance and overall investment objectives.
An example would be to divide one's cash holdings into fourths, let's say, and commit to investing each of those chunks on a set schedule (say every quarter for the next year, or every month for the next four) whether the market goes higher, lower, or nowhere at all. If the market goes higher, you don't miss out on all of the rebound. If it goes lower, great! You're now reacquiring the merchandise at more attractive prices. If it goes nowhere in particular, you're back in the game after paying only some modest transaction costs.
The key here, as always, is elevating discipline over emotion. Investors once again feel burned, and that feeling is entirely understandable. They have been burned! But they shouldn't let their emotional demons exacerbate the problem. Read Buffett, and think hard about the implications of his simple, deep insight:
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
A sense of wariness isn't all bad. But investors shouldn't let caution turn into fear and fear turn into paralysis. By the time you feel that reassuring burst of confidence, it'll be late in the game once again, just as it now for panicked sellers.
Investors will berate themselves for the panic they are now exhibiting. This, from an advisor that has adamantly argued for over a decade (with the exception of 2002-2003) that the stock market was strenuously overpriced and likely to deliver disappointing long-term returns. My impression is that investors who abandon properly diversified and carefully planned investments here, with the stock market already down by nearly half, will regret it as the emotionally panicked decision that wrecked their retirement prospects.
Remember: The challenges are always more emotional and behavioral than technical or informational.
Yesterday's historic rally got equities back to where they were...last Wednesday.
We sensed some sort of bottom (even if it's only the short-term kind) taking shape when we received a phone call over the weekend from a friend whose husband was about to liquidate his IRA rollover accounts. Which he did, in spite of our counsel to the contrary, pulling off a sort of reverse-rebalancing move by selling his losers (stocks) and plowing the proceeds into his winner (a money market fund). This guy is stratight out of behavioral finance central casting.
Interesting piece over the weekend from the Wall Street Journal's Eleanor Laise, who produces solid work on defined-contribution retirement plans. Though we think one of Laise's sources, New School professor Teresa Ghilarducci, goes too far in describing recent market turmoil as "a final obituary" for 401(k) plans (and the like), it's certainly true that turbulent times expose and exacerbate many of the flaws in the participant-directed model. One example: "Another risk...is that workers will now stop contributing to 401(k) plans just as markets are offering some of their best bargains. This is a 'fatal flaw' of 401(k)s, Ms. Ghilarducci says. 'People will stop saving in their 401(k)s right when assets are very cheap.'" Not good.
Whatever relief might flow from the massive injection of public resources and guarantees, the economic effects of the unfolding recession will be substantial. These aren't robust times, but it would be nice if the buying and selling on Wall Street were more a function of economics and earnings than short-covering and panic.
Court reporters will tell you they can always tell the innocent from the guilty on these kinds of perp walks, and the Wall Street crowd yesterday looked particularly guilty, unable even to conjure up a soothing word to a nation fretting over its shrunken 401(k)s, or a simple thank you to taxpayers for having saved their bacon. Their silence and invisibility throughout this crisis attests to the moral and political bankruptcy of a financial elite that is the perfect match for the financial bankruptcy they have now visited upon their investors, their creditors and their customers.