Have You Got A System?
Could it finally be ending? What‚s it? This long, grinding, seemingly endless period of purging the excesses of the 1990s that has run its course for the last three years.
Maybe I‚m overly optimistic, partly because it‚s a beautiful spring day outside. Only one week ago, the Northeast was pelted by the latest in a long list of snowstorms that turned this most recent winter into a mirror image of the recent bear market.
The speed with which consumer confidence reversed direction in March as it became clear that the war in Iraq would cost remarkably few American or Iraqi lives certainly perked up the nation‚s spirits. There has been other positive economic news in the last month. Initial jobless claims fell substantially in early April. The rebound in stock prices from their March lows has sparked a pick up in mutual fund sales, according to several executives at independent brokerages. And our national savings rate, which turned negative in the late 1990s, is now running at a 4% rate (meager indeed, except when you realize that rate excludes 401(k) contributions, the nation‚s primary savings vehicle).
But expectations of a buoyant, V-shaped recovery in the economy and stock market still look like just another case of lingering irrational exuberance. As Jean-Marie Eveillard remarked last month in Financial Advisor, the explosive boom of the 1990s was followed by only a soft landing and brief recession over the last three years, so the case for a powerful snapback based on pent-up consumer demand is flawed.
While the economy held up much better than the stock market over the last three years, it is still way too early to identify an inflection point in the business or market cycles. Just because it‚s uncertain whether a bottom has been reached doesn‚t mean people should stop investing. The good news is that for the first time in years price-sensitive investors like Eveillard are finding compelling values, even if they don‚t think the overall price level for equities is cheap.
Predictably, these signs of a turnaround are coming at a time when many advisors are finding that clients who have endured three years of an inexorable bear market remarkably well are finally feeling the urge to throw in the towel. Even for individuals with a high risk tolerance, the extended character of this market decline has challenged those with iron-cast stomachs. One of Wall Street‚s overused aphorisms is that you can‚t end a bear market without total and complete capitulation. Whether it‚s accurate or not is another question.
But much of this talk about whether or not we‚ve hit bottom misses the point, as our veteran columnist Nick Murray has reminded me before. Any sensible client knows that the best advisors have little better ability than anyone else to predict the future and so they don‚t expect it. What they want is the confidence that their advisor has a system, method and philosophy that will carry them through this period and enable them to reach their financial goals.
That‚s only a fair expectation for a client to have. The good news is many advisors are delivering on that expectation.
Evan Simonoff, Editor-in-Chief