Newsletter Fourth Quarter ’08
By Larry Halverson
So, how bad was 2008?
For many markets, 2008 was the worst year on record. The broad MSCI World Stock Index recorded a loss of -42%. Formerly booming stocks in China, India, and Russia fell roughly -50%, -65% and -70% respectively. U. S. stocks fared better, but still saw declines of -33% for the Dow, -38% for the S&P 500, and just over -40% for the NASDAQ (capped by fourth quarter declines of -19%, -22%, and -24% respectively).
This NASDAQ loss in 2008 exceeded even that of 2000 when it dropped -39.3%, making this the worst year in NASDAQ ‘s nearly 40-year history. For both the S&P 500 and the Dow, 2008 was the third worst year on record. Although the expectation of a snap-back following such declines seems reasonable given the market’s propensity to “revert to the mean,” the record is mixed. The Dow did advance 47% in 1908 following its -38% decline in 1907, but it declined another -23% in 1932 after its -52.7% decline in 1931. More encouraging, perhaps, is the S&P’s more than 20% bounce in 2008 following its November 20th lows. Only once in the post-war years did such a bounce fail to ward off a subsequent lower low.
The few U. S. stocks that did provide positive returns in 2008 were primarily acquisition targets, like Wrigley (+37%) and Anheuser-Busch (+31%), or bargain retailers like Family Dollar (+36%) and Wal-Mart (+18%). The worst performers, of course, were the many financial companies that closed their doors or were forced into a union with a less distressed suitor, and the autos.
Bond markets around the globe provided wide-ranging results. The U. S. Federal Reserve’s dropping of short-term rates from 4.25% to near zero and the international flight to quality drove 2008 Treasury returns to near-record levels (approximately 15% overall and nearly 45% for 30-year Treasury Bonds). Other top-rated bonds provided returns generally somewhat in excess of their coupon rates, but medium and lower quality issues saw negative returns of as much as 90% for some mortgage-related issues.
Real estate markets declined across the globe, led by U. S. residential properties, but followed closely by international residential, and then by foreign and domestic commercial properties as the year ended. Virtually no real estate-related securities provided positive returns in 2008, while losses ranged from single digits to 100%.
Although stocks and bonds produced more than enough anxiety for most investors, the energy, materials and currency markets provided even more. Crude oil began the year around $90 per barrel, hit nearly $150 mid-year, dropped to the low $30s in November, then closed the year near $60, down approximately -35% for the year. Natural gas traced a similar pattern ($9 to $14 to near $5, then just over $7). Agricultural commodities were also highly volatile, and also provided generally flat (food grains) to strongly negative returns. Even precious metals proved to be both volatile and vulnerable, with gold ending the year down a modest -5%, but silver, platinum, and palladium all fell by nearly 50%. Currencies provided perhaps the best opportunities for profits as the U. S. Dollar generally matched or gained against most other currencies.
Overall, 2008 was one of those rare years during which there was virtually no place to hide. Diversification moderated losses somewhat, but only cash and Treasury securities provided dependably positive returns. Although we maintain significant concerns regarding the economy and markets into 2009, we are hopeful that we will see some market recovery before year-end.
We believe the most prudent approach for long-term investors is to retain diversified exposures to most (especially the more downtrodden) areas of the markets, along with a significant cash component. This “bar bell” approach should provide any needed liquidity as well as reasonable returns whether we experience further market declines in 2009 or begin to see the initial signs of recovery.