It is difficult to come up with the proper words in a time like this – the words to not only reassure investors, but to also explain the market’s behavior. But try we will.
The Dow has fallen 20% in the last seven trading days. And of course that was on top of what was already a bad year. The market volatility, particularly Thursday October 9th, feels like pure fear, the decline reaching a crescendo where no sector is safe. Typically in market downturns investors gravitate toward areas like healthcare and consumer staples, which tend to hold up better than other sectors since their businesses are more stable. But even these sectors have been hit hard. When companies like Johnson & Johnson, Campbell Soup, Proctor and Gamble, and many others like them fall 8%, as these three did on Thursday, you know there is panic in the market.
Our entire financial system, and our economy, is built on confidence. The lack of confidence in the financial system has triggered a loss of confidence in the future of the economy. Franklin Delano Roosevelt’s famous words – “the only thing we have to fear is fear itself”- very much apply today. Fear that the financial system is collapsing has itself become the main problem.
The government has taken action to deal with the problem, as it should. Unfortunately, when the government acts, there is always the risk of unintended consequences. The government’s decision to raise the cap on insured bank deposits and to insure money market funds has contributed to the exodus from stocks and into bank deposits and money market funds, as the latter are now safer than they were before. This is not to say that the government’s move was the wrong one, or that this element of the situation is the main cause of the correction. It’s merely an observation about what is happening.
As we have always pointed out, we eat our own cooking at Oak, and so we are feeling the pain our clients and shareholders are feeling. We wrestle with the same personal financial issues as everyone else as we watch the market decline and a good portion of our wealth disappear. It’s no fun. The question is what do we do from here?
As always it is important to take a step back to look at the big picture. The current crisis is being compared to the Great Depression, which of course is scary. It is important to understand, however, the differences in policy between then and now. The lack of action by the government during the Great Depression made the situation far worse than it otherwise might have been. While today’s legislators and Federal Reserve (Fed) have taken some questionable steps, there isn’t any doubt they are fully engaged in dealing with the problem. It doesn’t hurt that Fed Chairman Bernanke has studied the Great Depression extensively.
Continuing on the big picture theme, the US remains a very good place in which to conduct business. We have the rule of law, a strong patent system, a democratic political system, tax rates that are higher than in many other countries but are far from confiscatory, the ability to trade internationally, a relatively stable currency, and a culture of entrepreneurship and innovation. A bet against the market at these prices would seem to be a bet against the viability of the system – a system supported by all those attributes. Not surprisingly, market sentiment statistics are ugly and mutual fund industry outflows are severe. According to Bloomberg, September was a record month for redemptions, and the first week of October put us on pace to shatter that record. Sentiment surveys are at extreme lows. The Volatility Index, or VIX, a measure of fear in the market, is double what would normally be considered a high level. These are all the type of thing you might see near market bottoms. Of course, they aren’t perfect timing tools, but then again, those don’t exist.
What could turn the tide? It could be a capital injection for the banks by the government or some other measure that hasn’t been implemented. It could be something as simple as a comment by Warren Buffett that he is finding real bargains in this market. Of course nobody ever knows what will make the market turn, but we are confident it will, and that in the long run those who are buying in this market will look smarter than those who are selling.
At a time like this I am reminded of the perspective of the late Louis Rukeyser, who, during one particular correction many years ago, pointed out that “you still have your health” (which is the most important thing). As much as this correction hurts, it doesn’t compare to losing our health, or to a catastrophic event like 9-11, or to some sort of nuclear attack on our soil, the likes of which we have thankfully never seen.
America, and the world, will get through this.
Mark Oelschlager, CFA
This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
Percent weighting of the following holdings in the Funds as of 10/10/08 were: 0% Johnson & Johnson, 0% Campbell Soup, 0% Proctor and Gamble.
The Volatility Index measures the implied volatility of the S&P 500 Index, an index of 500 large cap, US stocks.