Financial Times has dubbed the decade just ended the
"Noughties", an appropriate moniker not only because of
the preponderance of the digit zero in the years of the
2000s (nought means zero in the Queen's English) but
also because of the zero positive total return (actually
a loss of 9.1%) of the S&P 500 during the decade.
The decade was also a
period of naughtiness from Enron to Madoff. Politicians
indulged in an orgy of misguided social policy,
businessmen in deceit and individual citizens in
greed-induced speculation. In the end, the decade came
Nonetheless, 2009 was a
pretty good year. After hitting a crushing low in March,
the S&P 500 rose 67% from there to end the year up about
26%. Emerging markets, having hit their lows in 2008,
did the best. Some rose 70% or more over the course of
the year. However, if one looks at the two-year period,
2008-09, many markets around the world, including the
US, are still under water.
As portfolio managers, the
experience of the last two years reminds us of an
important lesson learned over the years. If we can do
better than the market on the way down, the way back up
is not nearly so difficult. The math is simple. After a
50% decline, a portfolio must increase 100% to get back
to its previous level. A 25% decline requires only a 33%
rise get you back to even.
experiences vary, fully managed portfolios of our
clients in the aggregate declined about 16% over the
last two years vs. just over 20% for the S&P 500 with
(Past performance does not indicate nor guarantee future
results. All results are net of expenses). This was largely
due to a substantially smaller loss in 2008 than the
market. We do not congratulate ourselves for we feel the
losses to-date acutely as we know our clients do. We
prosper only if our clients do. Investing is a difficult
business. We have no control over the market nor do we
believe that market timing can produce superior returns.
But we do take some comfort in the fact that as
professionals we have been able to mitigate losses in a
period of extreme turbulence.
Looking forward there are a
few things about the economy that we know with some
certainty. Corporate earnings will increase compared to
a dismal 2009; taxes will be rising; interest rates are
likely to be higher by year-end; government budget
deficits will go to record levels.
But this is also a period
of an unusually high degree of uncertainty. What will
increased financial regulation mean and how will it
affect the banks' willingness to lend? What will be the
unintended consequences of any healthcare program that
passes? Will business begin to invest and hire more
workers? When will housing bottom and stabilize?
The outlook for the stock
market is particularly hard to assess. After a 26% gain
for the year, our instinct tells us to be cautious. Yet
after similarly strong gains in 2003 following the
dot-com meltdown, the market rose another 49.1% by
October 2007, registering double-digit gains in every
year but 2005. Could it happen again? You bet. Will it
happen again? We don't know.
Corporations are now in the
process of announcing fourth quarter 2009 earnings. The
short-term direction of the market will depend upon
whether earnings exceed already high expectations. It is
plausible that they might. Q4 2008 was so dismal that Q4
2009 is bound to look good. Also, when the severity of
the recession hit in Q4 2008, companies were unusually
quick to cut costs, lay off workers and cut production.
Now that the economy has stabilized and begun to grow,
they are lean and profitable. Productivity is high and
revenues are in many cases growing. The hope is that
companies will begin hiring workers once again.
Though the stock market has
risen sharply in the last nine months, it has been a
market of unbelievers. Daily trading volume on US
exchanges has been noticeably low. This could change.
There remains a lot of liquidity on the sidelines
earning low returns. Real estate is less competitive as
an investment alternative to the stock market. This
suggests that should money begin to flow into stock
markets performance could surprise to the upside.
So, here's to the next ten
years. Be it noughty, naughty or nice, we will be
slugging it out in the trenches for our clients.
* * * *
The SEC requires us each
year to offer to clients our Form ADV II, which
discloses important information on how we manage client
funds and run our business. You can find the form
(technically a "replacement brochure") in the
"Disclosures" section on our website at www.prherzig.com.
Let us know if you would like us to mail you a hardcopy.
Also FINRA requires us to ask clients periodically to
advise of any changes in address, financial
circumstances, or financial objectives. Please let us
know if we need to update any information.
Please read our important notice
about these letters and the securities they mention.