Turmoil in the real estate and financial markets has taken a massive toll on our balance sheets and on our peace of mind. Investor sentiment hit a forty year low towards the end of February. Thankfully, we’ve seen an improvement in sentiment and a significant market rebound in March. The reason the market is rebounding is that it is getting a better understanding of what the rules are and what it can expect from Washington, although visibility is still impaired. There is more cash on the sidelines right now than there has ever been in the history of Western Civilization. All we need is a catalyst and that money will pour out of money market funds and into real estate, stocks and bonds (all of which are cheap).
Most of our clients are retired. For retirees, the market volatility has been very stressful. It’s caused many to cut back on their spending and re-evaluate their lifestyles. But it hasn’t caused their lives to come to a complete stop. They’re still as active as ever. They have grandchildren being born, graduations and weddings. Some are still taking trips. In recent months, our clients have been to Italy, the U.S. Virgin Islands, and all over the United States. We have a family that is going to the Calgary Stampede in July.
This behavior personifies the “Life Goes On” thesis that will lead to improving investor sentiment and the eventual healing of our economy. We’re still going to buy the essentials (whatever we deem those to be), we’re still going to make college tuition payments, and we’re still going to take family vacations. And within reason, we should.
There comes a point where we have to look fear in the face, accept the hand that we’ve been dealt, and move on with our lives. That doesn’t mean that there isn’t uncertainty regarding the short-term future, but over the long-term, the picture is good. Markets don’t boom or crash forever. Eventually the pendulum swings back the other way.
The pendulum (i.e. the economic cycle) never stops moving. We’ve been in a bear market since October of 2007 and we’re much nearer the end than we are the beginning. The stock market will rise significantly before we know for certain that the recession is over. If GDP growth gradually improves and becomes positive in the first quarter of 2010 (as Fed Chairman Bernanke has hypothesized), we are likely to see the market rally several quarters before that, which makes a market rebound in the next six months likely. Remember, the stock market is a forward-looking indicator.
I believe we’re at the point in the market cycle now where people are making choices based on long-term hope rather than short-term fear. We’re still going to see some spectacular short-term gyrations. But the long-term destination of asset values will be much higher than they are today.