SANDERS MARKET REPORT

by Emily C. Sanders, CPA

December, 2008 

The global financial markets in 2008 can be seen as an "annum horribilius", to quote Erasmus, and the 2009 economy will present many growing challenges.  This is a historic time with rapid fire litany of ugly news in every conceivable respect, of which the Bernard Madoff ponzi scheme disaster was the moral bottom.  Almost everything that has been predicted was proven wrong, and as a civilization, global imbalances have caused Americans to re-examine long-held assumptions about our standard of living and our institutions.   2008 marks the end of an era of global credit expansion based on the US dollar as the primary international reserve currency.  One of the only major bright spots this year has been the Beijing Olympics.  2008 was the year when long-held market beliefs and models were questioned, such as: a well-diversified portfolio of stocks and bonds will shield one from all risk; buying and holding quality stocks is the best long-term strategy; the regulators will protect individual investors from market abuses; if you save and minimize debt to manage investment risk you won't be adversely impacted; and a good education shields one from job loss. 

 

2009 will kick off a new administration and high hopes, yet not enough to stall the rise in unemployment to near 10% by year-end and the collapse of many national retail names.  Expect unprecedented trials of business figures and a high-profile executive to be sentenced to jail: Dick Fuld, former CEO of the now-defunct Lehman Brothers.  Housing prices will bottom in the second half of 2009 as the inventory of unsold homes declines, aided by lower mortgage rates; stock markets will get better once the bond markets thaw further, and Fed Chairman Ben Bernanke's policies of massive monetary stimulus will be vindicated, although gold will continue its rise.  China and India will regain their footing as the economic growth spots in the world order, not without civil unrest.  The key to wealth-building success in 2009 will be tactical in nature, along with willingness to pivot frequently including the use of covered call options as volatility continues at a high pitch.  Confidence will be slow to be restored, and indecision will linger.  While oil prices were manipulated by speculators in mid-2008 (and current low prices are like a tax cut for Americans), look for oil to return to $60/barrel in early 2009 and for a big infrastructure push to be made for alternative energy.

 

There is always a disposition in people's minds to think that existing conditions will be permanent.  Consistently declining equity prices are not the norm historically.  The stock market has recorded positive total returns in 71% of the 82 years since 1926.  A super-boom has just been completed that lasted more than 30 years, and assets of all types have been "marked down".  The flip side to this painful reality is that for those having cash or access to credit, next year will present opportunities to purchase financial and real assets at values not to be seen for another few decades.  Forced liquidations by institutional investors, mutual funds and hedge funds have been partly responsible for the market's violent moves to the downside.  The hedge fund industry is shrinking from $2 trillion to under $1 trillion.  Having less money invested in hedge funds is good long term because it means less volatility and less competition for investment ideas.  Almost half the gains of the next bull market will be reaped in the first six months, long before the recession is declared officially over in 2010.  Much has been made of the parallels between now and the nightmarish Great Depression of the 1930's.  Make no mistake, there are similarities, however, the current crisis is more akin to the 1973-74 recession, and an end is in sight.  Be patient - while there won't be a fast recovery, this too shall pass. 

 

In this season of good will, we thank you for your business and association, and trust that you are blessed with the things that matter most in life:  the love and support of family and friends, the joy of giving, and good health.

Emily Sanders

Sanders Financial Management

Atlanta, Georgia