During this holiday shortened week of trading on Wall Street and amidst the recent carnage, indeed thus far a November the likes of which investors have not experienced since 1987, in a perverse manner investors should be ever cognizant for what to give thanks. It is with this in mind that we have created a short list of what, we as investment advisors are thankful for as we enter the final week of November.
The first thing we are thankful for is the fact that there remains only one trading week left to this miserable month! Going into trading this past Friday the Dow Jones Industrial Average had fallen 8.12% since the close of October. To find a month nearly as dismal we had to go back to 1987 when the Dow fell 8.02% during the entire month of November. One might ask, then why be thankful. It is with the belief that the next six months will be similar to the six months ending April 1988, a period of time that included that 8.02% plunge during November 1987. Those six months ended with the Dow Jones Industrial Average up nearly 11.00% from the lows set during that November! What would this mean for the Dow at their current levels? It would mean that the Dow would climb back neat its pre-correction drop of 14,190 by the end of April 2008.
The second thing that we, as investors are thankful for is the high degree of anxiety in the stock market as evidenced by the Chicago Board of Options Exchange Volatility Index affectionately known as the “VIX.” This index measures the implied volatility of the S&P500 over the next thirty days. Furthermore, it is an inverse predictor of the direction of the stock market. In other words, the higher it goes the more likely the stock market is bottoming out. We took a look at the recent level of “30%” registered on registered at the close of trading on November 12th and compared this reading to similar levels over the past seventeen years and discovered of the 286 times volatility was this high, or in other words investors were as pessimistic, twelve months later the Dow Jones Industrial Average was an average of nearly 19.00% higher. Furthermore the Dow advanced 248 of the 286 times or nearly 87% of the time. Interestingly of the 38 times where the VIX was at least 30% and the market fell over the next twelve months, 36 occurred during 2001 when we were in the midst of the worst bear market in more than twenty-five years! Therefore, if you don’t think we’re entering a period of prolonged recession, the increased VIX is reason for optimism.
The third thing that investors should be thankful for is the strong global economy and the fact that our economy now represents less than 40% of total global economic activity as compared to 70% one-quarter of a century ago. Long ago investors adhered to the belief that “when the United States sneezes, the rest of the world catches a cold.” Although the recent economic slowdown in the U.S. is some cause for concern about the global economy, be thankful that we are less of 40% of global economic activity. The true engine of global economic activity is not the United States but rather the “BRIC” countries represented by Brazil, Russia, India and China, four countries whose total population exceed 2.75 billion people! The United States economy has a vested interest in moving these countries from third world to second world thereby creating a middle class. By helping to create a middle class in these countries through “fair trade” we are securing our own.
Finally, like all investment advisors, we are thankful for our men and women who are so valiantly serving in the military around the world, protecting our freedom. Being a history buff, this reminds me of that famous rallying cry of “freedom isn’t free!” Best wishes for a Happy Thanksgiving weekend!