Market Update

Today’s investment environment is reminiscent of a recent article on fox hunting by Dominic Bliss of The Financial Times, entitled “Manhunt”. Since fox hunting has been banned in England and Wales since 2004, Bliss went to Blackpool England to see how things have changed. She described the modern day fox hunt as follows:

“At Peagram's Farm [Blackpool, England], 35 excited riders - the huntsmen in smart red jackets, the rest in black or tweed - are waiting for the hunt to start. They sip port and sherry to brace themselves against the wind coming in off the Irish Sea, while their finely groomed horses jig their heads and stamp their hooves.

Below them, whining and barking in anticipation, is a pack of about two dozen bloodhounds. Mingling with the dogs, and looking decidedly apprehensive, are two "foxes" - Richard Davies, a 49-year-old civil servant from Kirkham, and Matthew Ray, a 32-year-old (off-duty) journalist from Brighton. Both are accomplished athletes.

As they pet the hounds, allowing the animals to memorize their scent, the master huntsman Clive Richardson offers a few words of encouragement. "Don't worry," he says. "When a limb's torn from you, it really doesn't bleed that much."

I believe many investors feel a little like the human quarry in this fox hunt as they try to navigate the financial wreckage that was third quarter of 2008. This historic quarter will be found in the next generation’s financial and history text books. It is a period when companies recently valued at a combined $500 billion vaporized. It is a time when the oldest money market fund “broke the buck” and fell below $1.00. A period when people were willing to buy US Treasury Bills for more than they would be re-paid after holding them for 1 month. It also marks the creation of the world's largest sovereign wealth fund, the US Treasury.

For the quarter, the S&P 500, the index which holds the 500 largest companies in America, was down 9% and down 20% for the year to date. More alarming is that the S&P 500 is up only 2.8% for 10 years. Investing internationally did not help with this bear market. The EAFE index was down 21% for the quarter and 31% for the year to date! Emerging markets where especially hammered, with the EM index down 27% and 37% year to date. The bond market, which usually moves in the opposite direction as equities also fell 0.6% for the quarter and was up only 0.5% for the year to date.

Is there a silver lining in all this bad news? Yes. Recessionary environments and market corrections are the best time to make smart investments. Today, everything is on sale. The question of the day is, "Will there be a “clearance” tomorrow?” The key to navigating this mess is to focus on the long run. If your investment horizon is seven years or longer and you can handle the risks of the market fluctuations, this may prove to be the best time to invest in a generation.