by Russ Wiles - Jan. 1, 2009 12:00 AM
The Arizona Republic
Enough, already.
Investors are hoping for a better time in 2009, if only because 2008 couldn't have been much worse.
As the housing slump morphed into an unprecedented credit crunch that unleashed a full-blown recession, investment values sank through the floor.
The stock market suffered its worst year since the Depression and, at one point, was down more than 50 percent from its 2007 highs. Bond prices also slumped as investors worried about mounting defaults. Even oil, gold and other commodities reversed course dramatically, sliding late in the year after a frothy early rally.
As the dust settled on 2008, the Dow Jones industrial average finished the year down 33.8 percent, excluding dividends, while the Standard and Poor's 500 index stumbled 38.5 percent and Nasdaq 40.5 percent. The broadest market measure, the Dow Jones Wilshire 5000, slumped 38.7 percent, equal to a $6.9 trillion loss in wealth for the year.
The stock market has stabilized in recent weeks after a stretch of incredible selling pressure from September through November. But if prices are going to rally strongly from here, investors will need to look over the abyss for several more months, as statistics on unemployment, consumer spending and the like could worsen.
"I think we've made the bottom for the Dow and S&P 500," said David Daughtrey, an investment adviser at Copperwynd Financial in Scottsdale. "But we still have some ugly economic numbers ahead."
Barbara Walchli, Phoenix-based manager of the Aquila Rocky Mountain Equity Fund, thinks the just-concluded quarter will be the weakest of the cycle, with positive economic growth not resuming until the second half of 2009. But she, too, thinks stocks have bottomed.
Although consumer sentiment still is sliding, professional money managers as a group are growing more optimistic.
About three in four investment advisers polled recently in a national survey expect higher stock prices in the coming year.
"Managers believe that the market has overshot the damage done by the ongoing recession and is now oversold and undervalued," said Erik Ristuben, an investment officer at Russell Investments, the Tacoma, Wash., firm that conducted the survey.
In a year when investors craved safety, small stocks, foreign shares, junk bonds and other speculative instruments got tossed out the window.
Only four of 50 stocks in the Bloomberg Arizona Stock Index gained ground in the fourth quarter, and 14 of Arizona's stocks lost at least half of their value just since Oct. 1.
"Historically, small stocks fare well coming out of a recession," said Walchli, who expects better performance ahead now that year-end tax-loss selling has concluded.
Foreign stocks also got hammered, with most European and Asian markets getting hit worse than the Dow and S&P 500.
"(Investment) managers see the financial crises facing other nations as taking longer to resolve than those faced by the U.S.," Ristuben said.
Other analysts disagree. Foreign markets now are more compelling than U.S. equities in terms of average dividend yields, price-earning ratios and other measures, said Thomas Melendez, a portfolio manager at MFS Investment Management.
"Global equities are down about 45 percent off their highs, and markets have already factored in a fair amount of bad news," he said. "(Yet) investors are still wary."
For stocks in general to advance, Daughtrey sees the need for further thawing in lending conditions. Although overborrowing is at the root of the economy's current ills, the backlash cut off credit even for healthy borrowers.
Daughtrey also hopes to see an easing in new jobless claims, continuing low energy prices and better corporate profits, although he expects those won't materialize until the second half of 2009.
As another plus, Walchli believes some investor uncertainty will clear up when the Obama administration assumes power.
Larry Adam, chief U.S. investment strategist for Deutsche Bank, cited several potential trends to watch in 2009, including these:
• A temporary deflation scare hastened by the recent slide in oil and other commodity prices.
• Bond market recovery as jittery investors start migrating away from Treasuries in favor of high-quality corporates.
• Commodity-price stability after the sharp retreat for oil, copper and other resources in 2008.
Adam also cited the growing importance of dividend yields as a means of luring skittish investors back into stocks.
After lagging for decades, yields on blue-chip stocks now parallel yields on 10-year Treasury bonds.
Everything is yielding more than Treasuries, including corporate and municipal bonds.
"This market is effectively pricing in a depression today where investors expect default rates (on non-Treasury bonds) to rise substantially," said Michael Roberge, an investment officer at MFS.
Consequently, higher-quality corporate bonds are attractive to many professional investors. In the Russell survey, 60 percent of managers expressed enthusiasm for corporate bonds, up from 37 percent in the third quarter and 8 percent in 2006.
Assuming the economy stabilizes and investor confidence improves, both the stock and bond markets could be bolstered by trillions of dollars of cash coming out of safe havens.
For example, investors have stockpiled a record $3.8 trillion in money-market mutual funds paying yields barely above 1 percent on average.
"At some point, we will see all this cash waiting on the sidelines start to come back into (other) markets," Melendez said.
Walchli cautions the rebound could take longer compared with prior downturns.
"It will be a slow-growth economy for a while due to deleveraging (shedding of debt)," she said.
"And a lot of investors have been traumatized."
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