Tarpley & Underwood
Financial Advisors, LLC
A View on Market Volatility
March 5, 2009
In light of the continuing market volatility we are experiencing, we wanted to offer an updated view of the market and the implications of the recent continued volatility. The following is some analysis from a firm with whom we work and from whom we obtain analytical analysis. We have modified their comments to reflect the specifics of our clients’ situations.
We continue to be faced with an extraordinarily difficult market environment, one that is probably testing your patience and confidence. We wanted to share with you our most current thinking about the overall environment and our investment positioning.
Perhaps the biggest question we are being asked is whether we’ve fully factored in the extent of economic damage that is now becoming apparent and being reflected in the form of major declines in the stock market. The short answer is that we are confident we have.
We understand that the powerlessness of watching the value of your wealth decline creates a strong desire to “do something” about it – to take control and end the pain. Going to cash may lock in losses, but at least it creates a certainty amidst a great deal of fear and uncertainty. These are the conflicting forces that every investor faces right now: the certainty of locking in a set (albeit painfully lower) level of wealth, versus the uncertainty of possibly more near-term losses and the hope of better longer-term returns. We want to give you perspective and information about how we’ve made that judgment, and to make sure you can accept the current risk levels in your portfolio (versus switching to a more conservative posture).
First, while this may not make you feel any better, we want to remind you that after the painful November lows, we’ve been saying that we would not be surprised if, in the short term, the S&P 500 exceeded those lows (of around 748) and dropped below 700. This has now happened. We make the point solely to make clear that while these declines are both gut wrenching and wearying, they do not represent new information to us or suggest that we’ve missed something in our analysis.
It is also important to understand that there is a great deal of economic uncertainty and that could take a further toll on stocks in the near term. It also makes it more difficult to forecast the longer-term value of stocks. What we can do about this is make assumptions that are so negative that we believe we have a good margin of error on the downside, and a high degree of confidence at least in the lowest end of our longer-term forecasted return ranges. We have done this work, which includes an intense focus on identifying the most negative scenarios we or other experts we talk to can envision, and factoring those into our analysis. So while we are never confident in what the shorter term will bring, we are confident that our scenarios fully take into account the possibility of a lengthy and extremely poor economic environment (where the earnings decline is comparable to the Great Depression). Based on that analysis, the stock market can still earn good returns from current levels over a five-year time horizon. It may also help to note that we are not alone in this assessment; even some very negative investment professionals, among the few who saw this crisis coming, now forecast positive multi-year returns for stocks. Importantly, however, capturing these positive returns will require maintaining that longer-term focus through what may continue to be a very trying period.
