Commentary and Articles
1st Quarter 2009 Quarterly Synopsis
"Hope Springs Eternal"
Equity markets worldwide continued to tumble in the 1st Quarter of 2009 as concerns over the global recession increased. Central banks throughout the world took steps to offset the increased risk perception by cutting rates as governments pumped money into economies to shore up commercial banks and provide some hope for recovery. Whether or not these efforts have a positive long-term effect is yet to be seen, but by the end of the quarter, U.S. markets had rebounded with March showing a 13.84% gain for the month.
The gain in March shows that risk perceptions are diminishing even as bad news on the economy continues to show forth in the media. Gains of this sort indicate that investors had over-discounted the economic data and that a worse situation than reality was already “baked in the cake.” Interestingly, as we discussed in the 4th Quarter 2008 Commentary, job losses tend to peak at the end of a recession and markets tend to recover before the end of a recession. It appears that may be happening now. Although it is too early to call the end of the recession, markets seem to feel better about the outlook than in recent months.
Much of the last 6 months we have seen a great deleveraging of the world economy reducing the financial risks of the bubble effect created over the previous two years by easy capital propping up housing markets in the U.S. This led to higher levels of consumer debt and lower levels of consumer savings than had been seen in the history of the U.S. In 2006, loans as a percentage of U.S. Gross Domestic Product had begun to outstrip the growth of GDP and the steep decline of equity markets over the last 6 months indicates the concern investors have for the tightening credit. Consumer savings is now at almost 4% of income, but with the historical average at 7%, we still have a gap to close. Since 2007, U.S. households have seen a collective drop in net worth of $8 Billion and households will feel the need to fill this gap. As spending continues at a slower pace than in previous years the world economy will have to adjust expectations. Lower interest rates and government funds will have a decidedly inflationary effect in coming years and while the risks of these policies are yet to be seen, policymakers have been unwilling to let the bubble burst altogether. The recent rise in markets though, indicates that investors felt an overcorrection had occurred in stock prices.
Housing markets are beginning to show signs of bottoming, with existing home sales up 5.1%, and new home sales up 4.7%. This increase also showed up in a slight rise in consumer spending on durable and non-durable goods in the 1st Quarter. Slashed prices at stores drove some demand, contributing to lower inventory levels and also showing that we are not out of the deflationary woods yet.
Credit markets show positive signs as well as fewer senior bank loan officers in the U.S. are tightening standards for commercial loans in the quarter according to a Federal Reserve survey. The spreads between interest rates on U.S. Treasuries and corporate bonds also narrowed slightly in the quarter, meaning that perceptions of risk are lower amongst bond investors as well. Also mitigating risks is the fact that large U.S. companies still have large stockpiles of cash which will allow for capital investment in growth opportunities without the need to tap credit markets. Commodity prices are lower, due mainly to a stronger U.S. Dollar. While the stronger Dollar shows a world still looking for a U.S. led turnaround, this will create less international demand for U.S. exports and may prolong the U.S. recession.
Portfolios benefited from rebalancing in the 1st Quarter as we were able to rotate some cash in to equity markets from appreciated bond holdings. Focus List holding Goldman Sachs (GS, NYSE) and new Focus List addition Apple (AAPL, NASDAQ) both gaining more than 30% for the quarter. Technology as a sector did particularly well over the quarter, while Industrial sector holdings underperformed for the quarter in the slowing economy.
Fixed income holdings in U.S. Treasury funds and those in inflation protected Treasuries did well. Also, holdings in high yield instruments performed well in the fixed income asset class as U.S. Treasuries peaked and capital sought higher yields provided by corporate bonds considered to have higher risks.
Fund holdings in commodity and foreign currencies were mixed. Foreign currency investments were hurt by lower interest rates in foreign countries which strengthened the U.S. Dollar, although performance was still good relative to equity markets for the quarter.
WHM Capital Advisors, LLC is a financial advisory and wealth strategies firm headquartered in Columbia, South Carolina, which specializes in valuing companies, designing exit strategies and managing portfolios for business owners. In addition, WHM Capital Advisors manages a select number of portfolios for high-net worth individuals, trusts, and foundations. The firm uses a diversified equity and fixed income strategy designed to meet the individual objectives of each client.