As the year comes to a close we can all breathe a sigh of relief that it is over; 2008 will go down in history as one of the worst investing environments ever seen. Obviously, the stock market was terrible; both domestic and international, but so was real estate and most all bonds outside of the treasury market. Even the commodity prices crashed with prices on oil, gas, soybeans, wheat and corn. dropping precipitously during the second half of 2008. As we enter 2009, we can be hopeful that we have seen an end to the bubble theme of the last nine years. As you recall we first had a stock market bubble in the late 90s, followed by a real estate bubble in the mid decade, then finally the commodity bubble in 2007-2008. Unfortunately for some it appears to us that another bubble is inflating in the treasury market as the flight to quality has brought the yield on the ten year treasury down to levels not seen since the end of World War II. When credit markets stabilize and the panic subsides we could see a spike in inflation with the big increase in monetary supply; this would be a bad situation for someone locking in 2.8% for ten years. It would be nice to get back to some normal markets.
The year saw a number of stock market records broken. The largest monthly decline, the biggest ever point gain and point advance, the worst year in modern history. The amount of bad economic news feels almost unprecedented. All the tell tale attributes of a bad recession abound: rising unemployment, multi-decade lows in industrial production, sagging real estate prices, and record home foreclosures. The equity markets have sold off for all of these reasons and more. Seemingly stocks are beginning to take bad news in stride. Expectations are so reduced and markets are so sold out that any sign of a lessening of of the crisis will be met with a strong stock market rally.
You have to look carefully but there are some positives for us all to consider:
- The declining price of oil, natural gas, home heating oil is saving consumers billions of dollars every month.
- The governments of the world are making sound and coordinated policy decisions, injecting trillions of dollars into the credit markets.
- Mortgage rates have been in a falling pattern, stoking the refinance opportunity and allowing people to begin buying excess inventory in housing.
- Dividend rates on stocks are higher than bonds for the first time in decades.
The reality is that the economic and financial conditions have changed markedly in the last three months of 2008. However, the long-term objectives of investors have not. We all still want to retire and spend in retirement according to our lifestyle. The need to grow wealth is as important today as ever before. There is only one way to grow wealth and that is through ownership. Ownership of real estate and businesses (public and private) represents equity and over the long-term the owners of equity will see their wealth grow. Bonds, CDs and cash do not grow wealth. They do play an important role in protecting and preserving wealth, but they do nothing to grow wealth. We feel strongly that investors that have left the real estate and stock market will return when prices begin to rise. Many people will fail to get back in or will at much higher prices than when they got out. We and our clients will have seen the bottom and by definition will be in place to get the full recovery when it comes.
Rick Manske, CFP