A Week in the Rearview – week ending 9/19/08
In the headlines
A look at some of the market movers over the past week:
- Lehman Brothers (NYSE: LEH) filed for bankruptcy
- Bank of America (NYSE: BAC) agreed to buy Merrill Lynch (NYSE: MER)
- Oil dipped below $100 per barrel
- Hewlett-Packard (NYSE: HPQ) announced nearly 25,000 layoffs
- The Federal Reserve bailed out insurer AIG (NYSE: AIG)
- Barclay’s (NYSE: BCS) agreed to buy Lehman’s investment banking unit and its New York headquarters
- The Federal Reserve decided to keep rates steady at 2%
- Morgan Stanley (NYSE: MS) and Wachovia (NYSE: WB) entered preliminary merger talks
- Markets soared on news that the US government is working on a plan to help out the ailing US financial system
- The Securities and Exchange Commission decided to halt short selling on 799 financial stocks
Commentary
I take a vacation for one lousy week and look what happens! While there certainly was a lot more going on that what I’ve listed above, the events listed far and away dominated both the headlines and the headspace of investors over the past week.
By the end of the week, the S&P 500 index closed out with a small 0.3% gain from the previous week — but what a wild ride it was to get to that end result. Monday and Wednesday both delivered 4.7% losses on the S&P, and by the close on Wednesday the market had shed an incredible 7.6%. In the final two days of the week, though, the index rallied an even more incredible 8.5% leaving behind the small gain that we ended with.
When all the dust had settled, we had a week to look back on where the market moved 4% or more in four of the five trading days. To find another week to compare this to we have to turn all the way back to the week of October 19th of 1987 when the markets took their historic one day plunge and then spiked back up 15% in the following two days. With that as a point of comparison, we can bet that this will be a week long remembered in the world of finance.
As I said, there was much more going on over the past week than the list above gives due. However, we can really attribute the explosion of volatility to four major events — the bankruptcy of Lehman Brothers, the buyout of Merrill Lynch, the bailout of AIG, and the government’s latest attempt at intervention. The first three events put a massive underscore and exclamation point on the financial troubles that have been shaking the US and caused the government to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) only a week earlier. Not only did the events signal that the turmoil isn’t over, but the bankruptcy filing by Lehman suggested that the government wasn’t going to be around to bail out every financial giant facing disaster.
The final event, though, the US government’s plan to rescue the financial system, rallied the markets like they’ve been rallied few times in the last half century or more. Since we’re discussing the market impact of the plan here, and not the political ramifications, I can simply say that the implementation of systematic purchasing of struggling financial assets by the government would create a solid backstop for financial companies and help arrest the potential panic that might have unfolded if current conditions continued unchecked. It was also a big turnaround from the Lehman bankruptcy filing earlier in the week, showing that the government is, in fact, armed and ready to do what it thinks needs to be done to shore up the US financial markets.
An evaluation of the economic impact of the government’s plan can’t really begin until the plan is laid out in full. And even then it may be difficult to gauge what such a huge and unprecedented program may lead to — for good or bad.
Looking ahead
If the outlook for the future ever had so much as a glint of certainty in recent times, that has been absolutely blown out of the water. Yet-unfolding events and underlying economic conditions have conspired to produce an action packed past week — to say the least. Looking ahead, not only do we have the specter of further true dislocation, but we can surely expect that investors will be on a hair trigger — buying and selling in big swings on the least sniff of big news.
Next week will no doubt be dominated by news covering the emerging details of the government’s bailout of the financial system, along with related developments in the financial sector. A light economic calendar and few notable earnings reports will only make the spotlight on the government bailout brighter.
As Monday and Wednesday of this past week reminded us, calling a market bottom can be a dangerous game. But with Thursday and Friday came a refresher course in why panic selling is not a good choice either. In fact, the rocky week we just experienced gives me yet another opportunity to hammer home the point that tracking the market on a day-to-day basis can often be not only a waste of time, but a huge emotional and financial drain. As a long term investor, your goal is to take advantage of the big five, ten, and twenty year moves in the market, not the comparatively small-fry swings in daily trading — no matter how jarring they may be.
This does mean that you will have money in the market when it declines, and it will sometimes mean that you will add to your investments at what, in retrospect, seems inopportune times. However, it also means that you will more likely than not also add to your investments at some incredibly timely moments. In times like the present it’s particularly important to remember this rather than get caught in the timing trap that many individual investors do.
Specifically, many investors invest heavily and happily when times are good — when it’s easy to invest. If they have held on this long through the current downturn, the beginning of this past week may well have shaken them out, finally causing them to throw up their arms and swear off the stock market altogether as too risky. Many of these same investors, however, will end up watching the market charge back up when the next bull market starts and eventually — say, two to three years into the bull market — will decide it’s safe to get back into stocks. For many of them this will mean that they will have sold at or near the bottom only to buy back in at or near the new top. I can promise you that this will make the process of building a retirement nest egg only more challenging.
Investors that hang on through the whole cycle will certainly not be able to boast prescient market timing skills, but they will no doubt outperform the hapless investors described above by a wide margin. At the same time, by keeping the big picture in view, they will also avoid the ulcers and indigestion that the other group will see in spades.
It would be a mistake to say that the financial markets and the underlying economy aren’t facing tough times. But it would likewise be a mistake to abandon diversified equity investing now. The US and global economy continues to grow and prosper, and though this won’t be the last bump in the road, it also shouldn’t be your exit point as an investor.
