|Nov-08||Y-T-D||1 Year||3 Year||5 Year|
|MSCI Emerging Markets||-7.53%||-56.71%||-56.56%||-5.47%||7.55%|
|Barclays Muni Bond 1-10 Yr||1.63%||2.65%||3.08%||3.92%||3.28%|
|Barclays High Yield||-9.31%||-31.42%||-31.22%||-7.62%||-1.81%|
|Barclays Global Aggregate||2.89%||-1.34%||-1.64%||5.18%||4.43%|
|CSFB Bank Loan||-7.89%||-25.95%||-25.73%||-6.64%||-1.88%|
|DJ-Wilshire US REIT||-24.55%||-48.34%||-51.09%||-16.65%||-1.99%|
|S&P-Citi World Property||-13.77%||-52.32%||-54.71%||-13.59%||0.34%|
|Red Rocks Domestic LPE||-32.12%||-63.96%||-64.70%||-27.75%||-11.88%|
|Red Rocks Global LPE||-22.75%||-63.41%||-64.66%||-18.39%||-0.99%|
|Returns provided by outside vendor. Innovest is not responsible for accuracy of numbers presented.|
The financial markets remained volatile and anxious in November. After the victory of President-elect Obama, investors redirected their focus to weak economic reports and worries of a long and deep recession. Earnings disappointments, lowered guidance for future corporate profits, and a flood of layoff announcements continued to weigh heavily on the markets.
October’s unemployment rate of 6.5% followed by November’s 6.7%, validated prior economic worries. The National Bureau of Economic Research confirmed that the U.S. recession began a year ago. Economic woes were magnified as American auto manufacturers General Motors, Chrysler, and Ford, petitioned Congress for as much as $34 billion in order to recapitalize their balance sheets. As November came to an end, Congress continued debating how much assistance it should provide to these arguably poorly run and failing businesses.
On another matter, the government announced a $20 billion purchase of Citigroup preferred shares, along with a guarantee of more than $300 billion of distressed assets on Citi’s balance sheet. With this move the Fed made clear its aversion to let another major financial institution fail.
Treasury Secretary Paulson announced yet another plan: the $200 billion Term Asset-Backed Securities Loan Facility (TALF) to facilitate to buy consumer and small business loans. Having already initiated a program to purchase commercial paper and the $800 billion TARP program, the government also indicated its intentions to purchase obligations of the government-sponsored enterprises (GSEs). These efforts are in hopes of lowering mortgage rates and consumer lending rates, lowering borrowing costs and easing the current credit cycle. The Fed’s efforts to inject liquidity into the credit markets through the use of quantitative easing and monetary policy are unprecedented. However, its actions have yet to stabilize the private credit markets, indicated by widening corporate and high yield bond spreads. The Fed appears to have made every effort to inject liquidity into the markets and encourage banks to start taking more risk. November numbers for jobless claims where encouraging, as they fell by 21,000 to a seasonally adjusted 509,000. In addition, Congress began debating a $500 billion economic stimulus plan.
Keeping pace with prior months, equity returns were dismal. Although returns were slightly improved on a relative basis to prior months, all capitalizations and styles suffered. U.S. small-cap stocks faired worst during November, posting an -11.68% return and a year-to-date return of -35.04%. While U.S. large-cap stocks were down 7.18% (and -37.66% year-to-date), they performed best in contrast to their domestic equity counterparts. In a reversal from last month, foreign equities slightly outpaced domestic, as the MSCI EAFE dropped 5.41%. Emerging markets’ slide slowed somewhat, but still underperformed relative to developed markets, down 7.53%. Oil traded at $48.25, down 67% from July’s peak of $147 bbl. For the month, commodities fell 6.96%. The high-quality fixed income market offered one of the few positive returns during the month, gaining 3.25% as measured by the Barclays Capital Aggregate Index (formerly known as the Lehman Aggregate Index). In contrast to other months in 2008, the high quality bond asset class resumed its former role as an uncorrelated investment providing protection to well diversified investors.
Market volatility remained at elevated levels, reflecting continued deleveraging, economic uncertainties and depressed sentiment. The volatility included a welcome rally in the equity markets during the last week of November. The Dow Jones Industrial Average and S&P 500 Index gained 9.7% and 12.0%, respectively, from their late November lows of 7,392 and 741.
Aside from late November, the market has yet to prove it can sustain a prolonged rally. While central banks have made every effort to create liquidity in the markets, the willingness of financial institutions to lend at affordable rates may be the determining factor in a market recovery. Many corporations will have limited ability to maintain sustainable growth rates without adequate and affordable capital. However, the Fed’s programs may just provide the needed actions to facilitate an extended market recovery. With the holiday season underway we have yet to see how retailers will weather the storm.
Many indicators point to great investment opportunities in corporate stocks and bonds for the long-term investor. Equities remain at depressed valuations and have become increasingly oversold due to technical aspects and panicked investors. Recently the dividend yield of the S&P 500 rose above the yield on the 10-year Treasury for the first time since 1958. Many investment professionals are citing this as a contrarian indicator for a market rebound and potential bottom. In addition, corporate bond yield spreads have expanded to 75-year highs, offering long-term, diversified investors an attractive opportunity.
Our time-tested investment process has been a frequent reminder that maintaining a long-term investment horizon and a well diversified portfolio is crucial during volatile markets. In the words of famed investor Shelby C. Davis, “You make most of your money in a bear market, you just don’t realize it at the time.”
W. Eric Overbey