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Five Key Points for Investing in the Coming Year: 1970s Bear
Market
2008
1st Key Point: Stock markets, on average, rallied over 34% one year after a recession Elections
ends, and economic expansions last, on average, 68 months for a cumulative gain of 2009
176% Predictions
401(k)
AMT
2nd Key Point: Much of the investment return occurs within the first three to six Bailout
Balance
months of the rally. Sheets
Banking
Bear Markets
3rd Key Point: Stock markets recover well before economic news turns positive. Breaking the
Buck
4th Key Point: Do not try and 'time the market'. Cash
Consumer
confidence
5th Key Point: Have a well-laid investment plan. Your investment plan should based Credit
upon factual, sound investment processes and one that is not based upon emotion. Credit Crisis
DALBAR
    demand
(See supporting charts and graphs below). destruction
Dollar
Domestic
Managing Your Investments in these Economic Times; Five Key Points, a exports
Economy
Detailed Look Emerging
Markets
The beginning of each New Year brings much fanfare to the art of making predictions Emotions
Estate tax
and creating resolutions. Last year I predicted I would lose 41 pounds. I did. My junk Exports
mail has been reduced dramatically with the help from the folks at www.41pounds.org Falling dollar
(They estimate we each receive 41 pounds of junk mail each year.) FDIC
Forward
thinking
I will resist the temptation to offer any kind of 2009 market prediction except for the GDP
following; Genworth
Financial
Goldman
This current recession will end and there Sachs
will be economic expansion that follows. Google
Hedge Funds
Income tax
How can I go out on such a limb with such a bold prediction? Inflation
Investment
Basics
Note the chart below which reflects the past nine recessions starting in 1946. In each Investment
of the nine recessions, economic expansion followed once the recession ended. On Process

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of the nine recessions, economic expansion followed once the recession ended. On Process
average, the past nine recessions have lasted 14 months with an average market Investor Fear
Jeremy
decline of 32.6%. The recession of 2008-2009 will last longer, and has already gone Grantham
deeper. John Bogle
JP Morgan
LIBOR
Liz Ann
Sonders
Mark Mobius
Market
Recovery
Market Timing
Market Views
Missing the
Market
Money Market
Funds
Mortgages
Mutual Fund
Liquidations
Oil
Past
Performance
Portfolio
Strategist
Recession
Required
Minimum
Distribution
RMD
Robert Doll
Shadow
Banking
System
Simplified
Over long periods of time, world economies will grow and then they will decline. It is 401k
very much a part of the business cycle. The good news is that in recent decade's Social
economic declines have been shorter and the economic expansions have lasted Security
longer. SPX 500
Index
Tax Cuts
The main 'take away' from the graph below is that economic expansion and market Tax proposals
recoveries occurred AFTER every recession. The average of those nine economic Taxes
TED Spread
expansions endured 68 months generating an astounding cumulative market gains of Testing the
176% return. This is how I arrived at my bold prediction. Bottom
Tom Brown
UBS
I am reminded of the minimal use in making short-term market predictions. In the four Uncategorized
issues of Barron's in January 1994, not one of the economists interviewed for the Unemployment
'Barron's 1994 Roundtable' called for an increase in interest rates that year. The US
Federal Reserve increased interest rates seven times over a six month period in 1994. Government
Bonds
US Treasury
I would rather focus on what I know will happen. This recession will end, and economic Bonds
expansion will follow. I am most certain that in each of the past nine recessions, fear VIX
and despair ruled the day; investors could not fathom any possibility for future Volatility
Warren Buffet
economic recovery. Sound familiar? Do you feel that way now? Weak Hands
Strong Hands
In these economic times, investors are challenged to believe that they are still on the
right track for investing. Quite simply, this global economic crisis has had the ability to
shake one's confidence in their investment strategy.

Given the magnitude of global news headlines and market behavior, it is easy to
believe one is not on the right investment path. During extreme market declines such
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believe one is not on the right investment path. During extreme market declines such
as the one we are in, you might think that selling all your investment and going to cash
is the right thing to do. An investor may have a unique need that dictates a certain
course of action away from the following recommendations, but generally speaking,
selling assets in a declining market is the wrong action to take.

1st Key Point:

Stock markets, on average, rallied over 34% one year after a recession ends, and
economic expansions last, on average, 68 months for a cumulative gain of 176%

2nd Key Point:

Much of the investment return occurs within the first three to six months of the rally.

This generally happens while economic news is still negative. Note the chart above,
15% return in first 3 months of recovery after a recession and 23% return within six
months, on average. If an investor is in cash, they lose out on much of the recovery
the markets have to offer.

3rd Key Point:

Stock markets recover well before economic news turns positive.

Financial markets are always looking into the future to determine their direction. In the
chart below, we can see the S&P 500 index from 1974 through 1975. The three
rectangle boxes reflect negative economic growth from Oct 1974 to July 1975 as
measured by US. Gross Domestic Product, GDP. Note how the market rose during
that same time frame, well over 40% in just nine months and over 30% in twelve
months, October 1974 to October 1975. The negative headlines of the day were
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months, October 1974 to October 1975. The negative headlines of the day were
plentiful; Nixon, Watergate, gas shortages, inflation etc.

This is what financial markets do; they will go up even while the current economic
news of the day is negative. As Warren Buffet has said, 'If you wait for the robins,
spring will be over'.

Another way to look at markets rising with bad news is with unemployment data.
Twelve months after unemployment peaked within a given recession, the S&P 500
index rallied, on average, 29%. Note chart below.

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4th Key Point:

Do not try and 'time the market'.

  This is to say, sell your assets now and wait a better time to reinvest in the future. It is  
widely known that market timing is nearly impossible to do successfully. The key word
here is 'successfully'.

I will recast work from my January 7, 2008 blog to help answer the question, why such
poor investor behavior?

'The Penalty for Missing the Market' is a study frequently created by Wall Street
investment firms reflecting the S&P 500 index over long time periods and what
happens to returns by missing just a few days in the market. I have referenced a
January 2007 Goldman Sachs report.

Simply put, when markets move, they do so in short, quick, explosive measures. If
investors are not in the market on those very few powerful, explosive days, annualized
returns will suffer greatly. As the Goldman report states, "Two Potential Keys to
Success: Patience and Commitment" Enough said! Hey if investing was so easy, we
might all be retired by now, right?

Average Annual Total Return: 1985-2006

S&P 500 Index 12.12%

Missing the 10 Best Days 8.56%

Missing the 40 Best Days 1.87%
Missing the 70 Best Days -3.02%

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If I could forecast the next best 70 days to invest over the twenty years, I would, but it
cannot be done.

Lastly, it is ok to recognize that investment time periods like this are emotional. It is
what makes us human. But we have to be careful to not let our emotions control our
investment process. In fact, our investments and their allocations must be based upon
well-laid plans that endure in all financial and economic environments. Are your
investments and their allocations well planned, can they endure all economic
environments?

5th Key Point:

Have a well-laid investment plan. Your investment plan should based upon factual,
sound investment processes and one that is not based upon emotion.

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Summary

It is very easy to follow your instincts and sell your investments by going to 'safe'
alternatives such as money market funds or certificates of deposits to weather the
storm. Knowing all the information in this article, I can say that this recession will end
and the markets will recover. As I heard it said in recent weeks, "its not what we own
going into a recession, (investment wise) but rather what we hold coming out of one"
What are you holding today?

Know that even when this recession subsides, another will happen again...it's the
natural cycle. So let me help you get informed on how to survive them and possibly
profit from them as we move through this cycle.

Thanks for reading. I welcome your comments, concerns or questions.

Best regards,

Dave Gratke

Addendum:

Recent weblog postings containing much of the content found in this article.

Stock Markets Rally before Economic News Turns Positive:

Stock Markets Rally Before Economic News turns Positive, Part One

Stock Markets Rally Before Economic News turns Positive, Part Two

Articles on Recessions and Market Recoveries:

It's Official, Now What and Where Do We Go from Here?

Recessions and Bear Markets: A History of Inconsistencies

Market Timing/Missing the Markets:

Why I Don't Time the Market

What to do now?

Missing the Market

Emotions in the Investment Process:

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Beware of the Hidden Cost of Cash

Just a reminder....Smart Investing Begins with a Disciplined Approach, not a Cycle of

Emotion

Posted in 1970s Bear Market, 2009 Predictions, Bear Markets, Cash, Economy,
Emotions, Investment Basics, Investor Fear , JP Morgan, Liz Ann Sonders, Market
Recovery, Market Timing, Market Views, Missing the Market, Money Market Funds,
SPX 500 Index, inflation, recession | No Comments »

The Next Bubble, Government Bonds

January 7th, 2009

Yes that is correct, Government bonds, including those of the US Government. The
next bubble to burst is expected to be in government bonds due to dramatic price
increases in recent months. Investors have poured significant sums of cash into bonds
driving up prices and lowering yields. (That's how bonds work.)

Graph below; Ten Year US Treasury Bond Yield

There are two factors at work here, supply and demand. In the past number of months,
demand for the 'safety' in US Government bonds has exceeded the available supply
thus driving prices up and yields down. Demand was created out of panic and fear.

With numerous government bailout packages being created, the US Government,

along with other Governments, will be forced to issue more bonds to fund these bailout
packages.

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Factor two, supply.

Supply will begin to increase at these historic low interest rates. The new supply of
bonds will drive yields up (as they already have) in order to attract new buyers.

REMEMBER, when bond yields rise, bond values fall. Over the next number of years,
bond yields only have one direction to go... up.

What others are saying about the bond market today.

Financial Times: 1/7/09

A fast deflating bond bubble?

Jim Rogers 1/5/09 (Co-founder of the Quantum Fund with George Soros)

Time to Short the Long Bond?

Marc Faber 1/4/09

The Treasury Market Bubble

Posted in Emotions, Market Recovery, US Government Bonds, US Treasury Bonds |

No Comments »

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