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Spurious comparisons between markets may
be amusing; but they do not provide a sound basis for
investment decisions. A recent example is that April 1
was the biggest one-day rally at the start of a second
quarter since 1938. Does anyone research these
factoids before they go to print?
1938 was during a depression. The market had bottomed in
June 1932, and then recovered just over half of its loss
through March 1937 before a Fed policy error pushed the
economy back into the depression. The April 1, 1938 rally
marked the beginning of a bear market rally which faded in
early 1939 and resolved into a deeper low in April 1942. One
could develop some potential parallels between now and then,
but for grins, not as a basis for deciding how this rally is
likely to play out.1
In my view, the better basis for investment
decisions is (1) a thoughtful analysis of which
investment strategies may merit consideration as we
work our way through the current cycle and (2) a more
systematic comparison with past market cycles. I am
working on a new article, “Putting the Bear in
Perspective,” which compares the current market with
other market episodes.
In the meantime, it may be helpful to review
where I think we are in this cycle. Having suggested
decreases in equity allocations in September and
October, I recommended initiating purchases on an
approach to 1276 for the S&P 500® while maintaining
flexibility for additional purchases at lower levels.*
With the market so far having bottomed at 1270 in
January and 1256 in March, many investors may have
some nicely bought equities. In my view, investors
need not panic into positions at higher levels. Yes,
with hindsight, now may prove to be a better time to
fill in portfolios; but then again, history suggests to me
that retests lower should not come as a surprise.2
In my view, more thoughtful investors will cast
a wider net than just filling in with equities. After all, if
there is anything that investors should learn from
periods like the last six months, it is that equities have
risk and that other investments often decline in
sympathy. Investors might do well to talk with their
financial advisors about more broadly diversified
portfolios. Something as traditional as buying long-term
municipal bonds, which currently are at
historically attractive yield levels, may be appropriate
for many investors. There are, of course, other
investments to consider, which you may want to
discuss with your financial advisor.
* The Standard and Poor’s 500® Index (S&P 500) is a broad-based
index, the performance of which is based on the performance of 500
widely held common stocks chosen for market size, liquidity, and
industry group representation. The index does not include expenses, fees
or sales charges, which would lower performance. The index is
unmanaged and should not be considered an investment. It is not
possible to invest directly in an index. This is for informational purposes
only and is not meant to depict the performance of any investment.
1 For example, to illustrate the potential for stretching a comparison, one
could note that the 30 month time period between the September 1929
high and the March 1932 low was about the same as the inflation-adjusted
time period for the post-2000 decline (August 2000 to March
2003), using monthly data. Moreover, by some measures, the post-2000
decline was the severest, net of inflation, since the depression.
Continuing the stretch, the time periods to the next high (March 1932 to
February 1937 and March 2003 to October 1007) also were about the
same. Moreover, this downturn, like the secondary downturn in 1937,
appears to have been greased by Fed policy. In my view, such
comparisons are potentially spurious and misleading. I do note big up
days and actually was impressed by the market’s action on April 1st.
However, I then watch for follow-through. The 4.8% rally on April 1,
1938 was followed by 3.7% on April 2nd and another big day on April
3rd. The point is that more than a single number from the annals of
investing is needed to inform judgments.
2 See “Observation 1” from my September 2007 commentary, “Lessons
from Market Panics” at
http://www.vankampen.com/vksite/news/commentary/index.asp. Click on “Archive.”
This material has been prepared using sources of information generally believed to be reliable. No representation can be
made as to its accuracy. The forecasts and opinions in this piece are not necessarily those of Van Kampen, and may not
actually come to pass. Information in this report does not pertain to any Van Kampen product and is not a solicitation for any
product.
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