THURSDAY DECEMBER 31, 2009

Remarkable Roller-Coaster Ride of 2009

The S&P 500 will gain roughly 25% for 2009. What a great year! But 25% only tells part of the roller-coaster ride of ’09. -25%, -63%, +67% and +25% are the real statistics for the S&P 500 for 2009.


We entered 2009 following the harrowing fourth quarter of 2008. Great uncertainty surrounded the collapse of Lehman Brothers, Merrill Lynch, AIG and Citi, to name just a few. The meltdown of the financial markets caused a 37% decline for the S&P 500 for 2008. Yet the market had already bottomed on November 20, 2008 and rallied strongly into the end of 2008. Many thought the late year rallied sounded the all clear sign. That thought was painfully wrong.

 

The S&P 500 opened with a 25% decline in the first 70 days. The shutdown of trading in the alternative asset markets (Hedge Funds, Private Equity, Securitized Mortgages, etc.) forced the liquidation of the highest quality, most liquid assets, as these markets were the only ones with liquidity. The stocks of the S&P 500 took one of the biggest hits. The early 2009 plummet put the peak to trough decline of the S&P 500 at -63%! Yet, the market bottomed on March 9th. Why? There was no major geo-political event, no brilliant government action or economic announcement. The “animal spirits” just returned. What followed was one of the greatest recoveries in stock market history. From the lows of March, the S&P 500 has rallied 67% and will end the year with a positive 25% gain. Remarkable! What a ride!

 

What are the lessons of 2009. First and foremost, it vividly demonstrated the folly of market timing. In the depths of despair of February, few folks were pounding the table to buy stocks. The rally just started and it started fast. 20% of the recovery return occurred in the first 10 days and 40% of the recovery occurred in the first 40 days! Waiting for things to settle down was a costly mistake. Second, the past eighteen months clearly showed that diversification works. While an all stock portfolio took a beating, a balanced portfolio weathered the storm much better. Finally, the greatest lesson of 2009 was that liquidity matters. There is a reason why hedge funds, private equity and other exotic assets generate higher returns…they are more risky and lack liquidity. Many an investor, both individual and institutional, underestimated their liquidity needs and paid a severe price in 2009.

 

2009 was a remarkable ride. Here’s hoping for a smoother one in 2010!   

POSTED AT 1899-12-30 10:23:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.