October's Bear Market

The good folks over at Lighthouse Financial Planning sent this email this morning. It is worth the read.

The month of October started off with the world in the midst of a major panic. On the heels of a very difficult September, equities around the globe fell dramatically during the first eight trading days of the new quarter. Markets rebounded briefly mid-month as global governments and central banks finally came together with a coordinated response to the financial crisis. The celebration was short-lived, however, as mutual funds and hedge funds were hit by massive redemptions by investors as well as margin calls by lenders. A major global sell-off resumed in late October with a climax in most equity markets on October 27th. At that point, the S&P 500 was down over -27% while other equity indexes were down substantially more.

Global equity markets finally reacted to the oversold levels by rebounding significantly during the final four days, with a rebound of at least +14%. But even after posting the best week for equities since 1974, October still finished as the worst single month in 21 years (since the October '87 crash). Where Do We Go From Here? To say the least, most investors (and advisors) are shell-shocked by what has occurred over the last two months. Month-end brokerage statements are liable to make stomachs churn. It is a natural inclination to feel scared and anxious about such a rapid decline in your portfolio. You want the pain to stop or feel reassured that the worst is behind us. While no one can predict what the market will do over the short-term, we can say that some very positive developments have occurred since mid-October.

These developments include:
· Substantial commitment of money to recapitalize troubled financials
· Coordinated interest rate cuts by global central banks
· Guarantees of inter-bank lending
· Dramatic increases of insurance for bank deposits
· Federal support of the commercial paper market

What is encouraging is that a number of the recent policy moves have begun bearing fruit:
· LIBOR rates have come way down
· Commercial paper (short-term debt issued by companies) volume has started to increase
· Banks have started to receive the initial payments from the TARP plan, moving from a theoretical concept to something real
· Action plans are being formed within the administration around how to stem the flow of foreclosures and support significant numbers of homeowners who are behind on their payments.

What all of these developments indicate to us is that the financial system meltdown risk has been greatly lessened by coordinated intervention on the part of governments around the globe. The major risk that's left relates to the degree of economic damage we'll see over the next year or so and the strength of the recovery that follows.
Without question, global economies are facing a difficult road ahead, as consumers and companies retrench. The world is facing a recession that will be longer and more difficult than anyone could have predicted a couple of months back. Therefore, we would expect to see additional aggressive policy moves in the weeks/months ahead and do not see Barack Obama's win yesterday interrupting the push forward. If anything, it is just one less piece of uncertainty to move markets.

Is Now a Good Time to Buy?
What is often lost among the talk of gloom and doom, however, is how cheap stocks have become as a result of the sell-off. Valuations across nearly all asset classes, even when taking into account pessimistic predictions, are beginning to look very compelling for long-term investors. For instance, the P/E of the S&P 500 is now 13.9, which is a level not seen since the mid 1980's. Also, several well-known investors and managers who have traditionally been bearish, have now become much more enthusiastic about today's values.

Our Strategy
We are not timers, we do not go in and out of markets wholesale. We believe in our asset allocation models and rebalancing the portfolio when triggered. When we rebalance an account it is usually only a few percentages of the total account value. Since the stock markets all over the world have fallen so much, real value opportunities are appearing and our rebalancing is leading us to buy the stock funds.

Feel free to pass this on to anyone you think might appreciate it.

Jim Johnson
CERTIFIED FINANCIAL PLANNERTM
Jim.Johnson@LighthouseFinancialPlanning.com


J. Jeffrey Lambert
CERTIFIED FINANCIAL PLANNERTM
Jeff.Lambert@LighthouseFinancialPlanning.com


Lighthouse Financial Planning, LLC
A Fee-Only Firm- Lighting your path to a brighter financial future...
http://www.lighthousefinancialplanning.com/
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Folsom, CA 95630
Ph: 916-932-7200
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