Year to date 2008

For the year to date through August, equity markets worldwide fell an average of 23%, with U.S. markets down an average of 10% (Standard & Poor’s). All 26 markets in developed countries were down an average of 23%, and markets in 24 of the 26 emerging countries fell an average of 18%. The Canadian Venture Composite was down 30%. Jordan (+11%) and Morocco (+10%) were the exceptions.
The entire S&P 500 dropped 13% for 2008 through the end of August, with 343 stocks declining and 153 gaining. All 10 sectors in the S&P 500 were down, with
financials (-27%) falling the most, followed by telecommunications (-22%). Consumer staples did the best, (-3.2%), followed by materials (-6.7%), consumer discretionary
(-7.4%), health care (-7.6%) and energy (-7.8%).
These results refute once again, the myth that there is safety in spreading equity capital around the world in a bear market. It also demonstrates why buying “defensive stocks” in a bear market is also a fool's play. All boats fall in bear markets. Saying you lost less of your savings than others, should be poor comfort.
But here is the next big issue that markets will have to face going forward: according to data compiled by S&P, analysts are predicting 2.4% y/y earnings growth for Q3, then a surge to a record 62% in Q4 and 27% for 2009. The probability of getting this type of record earnings growth over the next couple of quarters is low to nil in my humble view.
I accept that I don't know much about the future. All we have is common sense and rational probabilities to calculate. But with the present Price to Earnings ratio of the S&P 500 already at an extremely lofty 26 times reported profits, (highest in 5 years, third highest in history) and the “E” in that equation risking more compression over the coming months, stock prices here must be clinging to a very rickety rung of hope.
Buyers and holders beware. You buy the “long always” party line from your broker/dealer/mut fund companies at great personal risk.

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7 Responses to Year to date 2008

  1. Anonymous says:

    Hey Danielle,
    Great post.
    Early in my career, a well-known analyst told me that the secret to longevity in this business is to:
    a) Choose a view – bullish or bearish. (He recommended “bullish” since bull markets usually last longer than bear markets).
    b) Hold that view FOREVER.
    c) POUND on the table that you're right – especially when the markets are moving against you.
    d) Remind people of how you pounded on that table, once the markets have turned in your favor.
    e) Only talk about your successful calls
    e) And the most important thing: ALWAYS have a view and ALWAYS make the client believe that you know the future.
    A lot of people can't see through analyst/broker/fund manager/talking head's glib predictions. They want to know the future and want to believe someone else must already know the future.
    In my mind, your credibility is enhanced when you make comments like you “don't know much about the future.”
    Oh – and that analyst who gave me the advice? He screamed BUY the whole way down during the internet bubble collapse. Not that it effected his personal finances though, he's comfortably retired now.
    Thanks for the “add” on your blogroll.

  2. Anonymous says:

    Danielle,
    I have often wondered how any investor can truly determine percentage drops or gains of their holdings without factoring in a change in value of the currency with which they are priced?
    What are your thoughts about this?
    Thanks

  3. Anonymous says:

    No truer words were ever written. Sad but very true.
    Thanks for that, D

  4. Anonymous says:

    yes as investors, every foreign security that we look at must be filtered on a relative basis through the currency it trades in. Technical analysis helps us greatly in this. For Canadians if the U$ is falling against the C$ there is little reason to buy a US risk asset, unless we hope the price gains will over-compensate for the currency losses. I strongly disagree with passive allocations to any foreign currency since ignoring this factor tends to bear return-free risk. And year end portfolio reviews should always be translated into the home currency.

  5. Anonymous says:

    Hi Danielle,
    Great blog, I look forward to your words of wisdom regularly. I'm curious, where can one find a chart or data of historical S&P earnings or P/E? You mention “26 times reported profits” and I've heard a range of other P/E estimates from other analysts recently. I'd like to get some historical perspective on trends and changes.
    Cheers,
    Martin

  6. Anonymous says:

    john mauldin's book “bulls eye investing” has a wonderful double page color chart going all the way back to 1900 focusing on PE vs. 10 year returns. the conclusion is not pretty, but I recommend checking it out.

  7. Anonymous says:

    Martin, one of the best historic PE charts around is found in Ed Easterlings work at Crestmont Research here:
    http://www.crestmontresearch.com/content/Matrix%20Options.htm. Also read his book, “Unexpected Returns”.

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