Third Quarter 2009
What a difference a year makes. In September of 2008 the global financial system came under extreme distress in the wake of the collapse of Lehman Brothers and the bailout of AIG. Fear dominated financial markets and panic selling decimated stock and bond markets around the world in a once in a lifetime event. U.S. stocks, as measured by the S&P 500, lost 57% of their value over the next six months.
Policy makers responded with deep interest rate cuts, massive coordinated fiscal stimulus and creative actions to help stabilize the global financial system. Signs materialized that the worst of the contraction passed in the second quarter as Asia had begun its rebound and the tide was turning in other regions. The highly synchronized downtown that began last September is now a highly synchronized recovery. Since the low point on March 9th of 2009, the market rallied 56% through September 30. The third quarter return mirrored the second quarter return of approximately 15.5%, resulting in a year to date return for the Dow Jones Industrial Average of 13.4%. We have now had seven consecutive positive months for the market despite mainstream media calling it a bear market rally over the entire period. I am pleased to report that the composite return of Shapiro Asset equity only clients exceeded the market results, with a return of 19.8% year to date.
The focus is now on the shape of the recovery, which appears to be real. The recession is in the process of ending as witnessed by improved housing data and the thawing of credit markets. Every week there are two or three corporate takeovers of some size. Inflation risk is currently not a factor and should remain tame for a couple of years. From an equity market perspective, the combination of stimulative policy and modest economic revival has and should continue to push stocks higher. Year-over-year earnings comparisons should be favorable and there is still a great deal of cash on the sidelines looking to enter the market, providing another positive jolt to returns.
The question is just how strong an economic rebound is likely to be. It is tempting to try to forecast short-term stock market swings, but I prefer to focus on our primary goal of building wealth through equities over time. I am optimistic about the long-term prospects for U.S. equities. Shapiro Asset remained committed to its core strategy – investing in equities to reflect each client’s risk/tolerance profile and time horizon. This strategy has allowed clients to participate in the market upturn during the past six months and will allow them to also do so going forward.