The last few weeks in the capital markets have been anything but dull. As most of Europe vacationed, volatility in major stock markets jumped, unnerving many and bringing, (not so fond), memories of September 2008.
To illustrate the point just refer to the broad based S&P 500 index performance in the last 4 weeks: It closed just shy of 1.300 on the last trading day of July, dropped 12% to 1.149 in 5 trading days, shot back up 4,5% to 1.200 by mid-August and corrected back to 1.160 by August 26th.
Right now the S&P is down 6% Year-To-Date and some 12,3% lower from its late April high of 1.363. Put bluntly this market has “gone nowhere in 13 years” as its current price (not adjusted for inflation) is the same it was in October 1998.
As this was happening, macro indicators from across the pond delivered ominous news in the form of unexpectedly low GDP growth forecasts from Europe’s last standing hope (read Germany). Not to mention increasing woes from other peripheral nations as they struggle to contain their growing public sector debt. Making matters worse, even the ultimate asset price inflator, a.k.a. Ben Bernanke, failed to prop up expectations at his recent speech in Jackson Hole. No mention, not even a hint was made of a new round of security purchases by the venerable “Fed”, leaving QE3 fans at a loss.
To cap it all, gold, which has served as the last refuge for many, delivered a brutal 100 $ drop on August 24th, bringing into question, temporarily at least, its suitability as a safe haven. In any case, it had appreciated by some 400 $ since mid-July, so in absolute terms such a correction should not come as a surprise.
Investors, both professionals and ordinary folks (the ones I talk to, at least) are rightly shaken by these events and often looking to exit what they consider to be high risk positions. Indeed, the week ending August 19th saw the biggest level of redemptions form Mutual Fund investors since 2008. According to the Investment Company Institute:
“Rattled investors pulled more than $40 billion from mutual funds in a single week this month as fears about the global economy intensified. The total of $40.3 billion was the biggest amount removed from mutual funds in a week in nearly three years”
Some notable hedge funds too have wound down their exposure over recent months, signaling that caution is the new approach. Dan Loeb, whose Third Point fund has annualized 19% since 1995 and is 8% up YTD, has recently continued his 3-month trend of lowering exposure to equities as is now only 23,3% net long versus 30,7% in spring.
So, is it 2008 all over again?. And what if it is?.
From where I am standing it is not 2008 all over again and even if it closely resembles it, one should not shy away for putting new money to work as we speak.
Firstly, leverage levels are way down from 2008 as corporations have been piling cash on their balances and reducing operating expenses to endure an economic downturn. With the exception of certain corporations (Bank of America comes to mind), public entities are in much better shape than in ’08. Just as importantly, equity prices seem to reflect a long drawn-out economic malaise as the current 12.6 S&P 500 P/E ratio implies. Comparing this starting point with the levels reached before the 2008 debacle should provide investors some comfort.
Whilst a new recession cannot be ruled out, the fact remains that money has to flow somewhere and the alternatives to equities are hardly appealing today. Gold, which lest not forget produces no income, is reaching stratospheric heights, US bonds (10-year) yield little over 2,2% even after the S&P downgrade and the real estate market shows no signs of life.
It is unlikely that we have seen the end of downside volatility for the time being and macro-economic uncertainty may continue to dampen spirits. However, from a valuation standpoint, some compelling company-specific opportunities are appearing and we may soon experience yet another investing “2009”.
To quote Mr. Warren Buffet’s memorable words from October 2008 as he made his landmark investments in GE and Goldman Sachs:
“If you wait for the robins, spring will be over”
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