An E-ticket week in the markets
Growing up I aspired to be a big enough girl to be trusted with an e-ticket at Disneyland. (For those who don’t know that reference, the scarier rides at Disneyland in the 70s required an e-ticket which was clearly something to which every aspiring cool kid wanted and being a particularly scrawny, buck-toothed, braces and headgear toting, unfortunate Dorothy Hamill haircut sporting, coke bottle glasses wearing math geek, I NEEDED one just to survive.) This week was a serious flashback to those adrenaline pumping rides, albeit my teeth are finally straight, my hair has recovered and I’ve expanded beyond my love of math while still maintaining a most-likely unhealthy love for Excel.
This past week the market changed direction 130 times, declined over 7.2% for a loss of over 843.79 billion in market capitalization and is now back below the pre-Lehman S&P500 closing level of 1,251. In addition, through Tuesday of this week, the S&P500 declined in the final hour of trading for ten straight days, which was the second time in two months that we saw a ten day streak of last hour declines. Going back to 1985, there was never a period where the index declined in the last hour for ten straight days. As we’ve expected all along, the markets now seem to be reflecting the reality of the credit crisis. It was never over, it just moved from the private into the public sector. We don’t expect this ride to end anytime soon!
On Monday the S&P rose over 1% on news of a potential debt deal only to drop by 0.86% after a weaker than expected ISM Manufacturing report. This was only the 10th time since 1985 that the S&P has ever been up 1% or more in the first half hour of trading, only to give back all of that and more by 10:30am ET. Of the 9 prior swings, seven came between October 2008 and March 2009.
Since the S&P500’s closing high on April 29th, the index has declined 12.04% over 98 calendar days. Since 1928, the S&P500 has had 93 corrections of 10% or more, averaging about one every 11 months. The median decline has been a drop of 16.4% over a period of 103 days making this correction milder (so far) than average in terms of price and about average in terms of time (98 days vs. 103 days). I feel it important to repeat, that we doubt this ride is over just yet.
US equities are all down by more than 10% in the last month alone, most international indices have fared far worse with France and Italy down by more than 20% The only asset classes that have been spared so far are Treasuries and precious metals. While conventional wisdom has been to get outside the U.S., so far this year companies that generate over half their revenues outside of the U.S. are under-performing companies that generate 100% of their revenue domestically by more than 500 basis points. Let’s hear it for diversification and bucking conventional wisdom!
The financial services sector continues to be the worst performer, down 5.53% YTD (and the only sector negative for the past 1, 3 and 5 years), with communication services the strongest YTD up 14.73%. All sectors were pummeled in the past week, with only consumer defensive and communication services in the black for the past 3 months, which is why we are so strongly in favor of our non-traditional version of asset allocation and diversification. We care less for sectors and asset types than diversification across expected correlations based on market conditions. In today’s environment so many of the old rules no longer apply.
