Do not fear, this is a cyclical change: Stanlib
03 Dec 08
In the Stanlib's Weekly Focus of December 1st, investors are urged to see the
current economic downturn in perspective. Paul Hansen, Group Director, Retail
Investing reminds investors of the gloomy sentiment that prevailed as far back as
1942, and by implication sees the current down trend as cyclical.
Have courage! We have been here before - and we've survived and prospered. In November 1974, the Chairman of the Capital Group in the US (a top asset management house) wrote a letter to clients, describing the 1974 bear market and also referring to the 1942 bear market.
What follows are excerpts from this letter, written 34 years ago:
"One significant reason why there is such an extreme degree of bearishness, pessimism, bewildering confusion and sheer terror in the minds of brokers and investors alike right now, is that most people today have nothing in their own experience that they can relate to which is similar to this market decline."
"I don‟t know if we have seen the absolute bottom of this prolonged bear market, although I think we‟ve seen the lows for a lot of individual shares." (It turned out that the market had bottomed the month before…October 1974.)
"Today people are saying: „There are so many bewildering uncertainties and so many enormous problems still facing us - both long and short-term - that there is no hope for more than an occasional rally until some of these uncertainties are cleared up. This is a whole new ball game.‟"
"Today (November 1974) almost every financial journal or investment letter carries a list of reasons why investors are standing on the sidelines. They usually include (1) continued inflation (2) illiquidity in the banking system (3) shortage of energy (4) possibility of further outbreak of hostilities in the Middle East and (5) high interest rates. These are serious problems."
"Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished. In fact, does anyone think that today‟s prices will prevail once full confidence has been restored?"
Similarly during the 2nd World War:
"In April 1942, amidst massive gloom, in the midst of a war we were losing, faced with excess-profits taxes and wage and price controls, shortages of petrol and rubber and other crucial materials and with the virtual certainty in the minds of everyone that once the war was over we‟d face a post-war depression in that environment, the stock market turned around."
"The stock market bottomed in April 1942 as investors realized that despite all the bad news, despite the extremely gloomy outlook, the US was going to survive, that strongly financed, well-managed companies were also going to survive. The reality was that those companies were far more valuable than the prices of their stocks indicated. So on April 29th, 1942, for no apparent visible reason, investors began to recognize reality."
Have courage! We have been here before - and we‟ve survived and prospered, writes Hansen. '(These situations) are similar in many ways to today, December 2008!! Enough said!,' he writes.
2008 situation
The US economic situation looks decidedly bleak: The banking system is stuck in a treacherous liquidity trap and consumers are dealing with the bursting of both a credit and housing bubble.
Businesses are being starved of credit too and bankruptcies are rising. The unemployment rate is also climbing quickly.
The rest of the world is weakened by the credit crisis. The Baltic Dry Freight Index (cost of shipping bulk goods like coal and iron ore) is off a whopping 94% from its recent peak only six months ago and has already reached a level that makes it almost impossible for the index to fall much further. This implies that not much is being shipped.
One could spend days listing all the bad news about growth and the world economy. However, if global efforts to stabilize finance, housing and consumer spending are beginning to work, then it is not impossible for the US economy to stop contracting in six to seven months time and for the rest of the world to stabilize as well.
Already we have experienced the worst bear market since the Great Depression and the stock market has already discounted a very ugly scenario (worst calendar year decline since 1825). So it is possible that the worst is already discounted by share prices.
