Starting with the basics, Consultant James Barnett of Raymond James Financial Services told the gathering at the Rotary Club of Sterling on March 16 that stocks are in a real “Bear Market” – defined as down for more than three quarters, resulting in a drop of market value of 20 percent or more.
Indeed, the U.S. investments have been going down since the record high in October 2007. The stock market was down 36 percent by the end of 2008, and is currently down an agonizing 56 percent.
Barnett used historical data to put the current situation in context, noting that in the 10 “Bear markets” since 1946, the average drop in value got down to 32 percent, and the bad market lasted about 18 months before turning around. The quickest recovery was in 1987, when the market recovered after just four “bear” months.
“We have witnessed the worst market sell-off since 1946, Barnett told the audience attending the Rotary Club’s second speaker in its “Tools for Tough Times” series. “It’s not over yet, but there was a significant bounce last week,” he said, referring to several consecutive days of good numbers.
Barnett presented numbers showing what an investment would have made under different scenarios over the past five years, with the bottom line that most growth over that time period has been wiped out in the volatile market. “We would need to gain 38.43 percent (in 2009) in order not to have the worst decade ever… just to equal the return of the 1930s,” he added. “As Warren Buffett has said, ‘The rearview mirror is always clearer than the windshield,’” remarked Barnett.
While comparisons with the 1930s and the Great Depression that started with the Crash in October 1929, Barnett noted some important differences: Unemployment in the 1930s ranged from 3-25 percent, but currently is running at 4-8.6 percent; Gross Domestic Production dropped 27 percent in the ‘30s, but only 1 percent so far this year; interest rates went up in the ‘30s, but they have gone down during the current crisis; and while there was no “global cooperation” or insurance of bank deposits during the Great Depression, we have those advantages today to help get us through.
So, what should investors do?
“Bull markets start with a bang,” Barnett noted, and if the bottom has truly bottomed-out, “There will be plenty of opportunities to make money over the next few months.” He advised caution, since there could be a further drop, but added that in three to five years, “The people who stayed in the market, or bought good stocks at their low point, will be glad they did.”
Like many other financial consultants, Barnett believes that the stock market will come out of the recession first, followed by other critical elements like the housing industry and retail sales. Unemployment will be the last element to see improvement, “…because it always lags behind the others,” he explained.
“The U.S. lead them (other world markets) into this mess, and we will lead the rest of the world out of it,” he concluded.
The next “Tools for Tough Times” topic will be “The Ins and Outs of Banking,” presented on March 30 by WashingtonFirst Vice President Sandy Lehrer. The presentation will take place at 12:30 p.m. at Logan’s Roadhouse in Sterling, and the public is invited. The presentation including lunch is $12. E-mail rcs-info@sterlingrotary.org to reserve a place.
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