Since all hell broke loose last fall, February marks the third month that everything went down. September and October 2008 were across-the-board losers, and so was last month. The only thing that gained, by a thread, was cash, based on 3-month T-bills, as our chart below shows.
The deep pain now coursing through the capital and commodity markets needs no explanation at this point. The global recession strangling the planet inspires only selling, hoarding cash and otherwise retreating from debt in any way, shape or form possible. This is a toxic combination and one that explains the various economic ills that are likely to roll on. The unwinding is also necessary to cure the problems that afflict the global economy, but no one expects the process to be pretty or speedy.
The fact that there’s no place to hide necessarily means that exposure to risk is like swimming with lead balloons. The only question is when we’ll touch bottom. Alas, this observer expects that the negative surprises still have legs, economically and financially. The economic and financial indicators that comprise our routine data analysis offer little in the way of hope for an imminent reprieve. It’ll take more time and fresh numbers in the coming weeks and months to even make a determination of whether the end of this year will be a floor on the pain, or just another signpost for additional trouble in 2010.
In the meantime, the trend is down. That said, the middling performance of our Global Market Portfolio Index (GMPI), while nothing to celebrate, is more or less what you’d expect from the true market benchmark. Second-guessing the market is never easy, and it’s getting harder by the day. Fear and emotion will take a hefty toll on mere mortals as they try to sidestep the ongoing pain while trying to position portfolios for the inevitable rebound. Mr. Market tends to get this balancing act right more often than not.
Looking ahead, it’s likely that the markets will begin a bottoming process well ahead of the economy. Picking troughs, of course, is still a dangerous game and then some in this climate. Yet some of the future is clear, or so your humbled editor thinks.
Consider that bonds have generally held up in the crisis, particularly government bonds. That’s no surprise, since the flight to safety usually means running to those institutions that can print their own money. The flip side is that risk has been hit over the head with a shovel, and it continues to take a beating. Something that approximates the opposite scenario is coming: risky asset prices will rise and safety will suffer. Timing, unfortunately, is unknown, and therein lies the primary hazard in money management going forward.
The only thing we can say for sure is that future rebound is now closer now than it was six months ago. (Yes, we know: that observation and $2 gets you a cup of coffee.) The expectation implies that our GMPI will deliver another middling performance on the upside once the healing process begins. Detailing why it will be middling, and why it will look so appealing once the dust clears, is one topic of discussion in the March issue of The Beta Investment Report. As a preview, let’s just say that the best-laid-plans of mice and active managers are no match for the dumb wisdom of Mr. Market’s passive asset allocation. Same as it always was.