Should We Invest With “Great Expectations?”

Monday, November 24, 2008 Holiday Discounters

Monday, November 24, 2008


Holiday Discounters

Investment markets of every type continue to discount their inventories to try to lure shoppers. It’s clearly demonstrated by dwindling trading volumes that investment shoppers remain quite content at home, anticipating further discounting to come. I fully expect this to be the trading environment for the remainder of the year. Those present in the markets will continue to discount their goods for sale and buyers will be scarce. As the holiday season approaches, we have effectively moved into the governmental “quiet period” when the lame duck president has no functional authority, and Congress has turkey and yuletide on the brain. The unfortunate result is that with the government absent, we have lost the primary protagonist in our developing economic story. Until Barack Obama takes office on January 20, markets will effectively shut down. We have seen this before…

What a difference a leader makes

Franklin Delano Roosevelt was elected the 32nd President of the United States on November 8, 1932. At the moment of his election the country and economy were in the deepest moments of depression. A quarter of the population was unemployed and millions were homeless. The banking system (without the safety mechanisms that are in place today) had largely collapsed, with bank runs the rule and not the exception. With a 57% share of the popular vote, Roosevelt brought with him high expectations. Nonetheless, between the day of his election, November 8, 1932, and the day of his inauguration, March 4, 1933, the Dow Jones Industrial Average fell another 17%. His inauguration speech, one of the most cherished in American history, offered the following:

“This great nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror, which paralyzes needed efforts to convert retreat into advance…This nation asks for action, and action now. Our greatest primary task is to put people to work. I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require.”

Roosevelt correctly recognized that consumers and investors had been paralyzed with fear. His first 100 days unleashed a landslide of legislation aimed towards reviving confidence and commerce. From the moment of his inauguration through the end of 1933, the Dow Jones Industrial Average climbed 83%.



While our current economic condition pales in comparison to the realities of the Great Depression, certain parallels can be drawn. Massive de-leveraging, banking solvency concerns, unusually rapid job losses, significant portfolio losses and broken confidence hearken back to those toughest of days. The current reality is that in this instance the response from the Fed and Treasury has mitigated many potential perils. The banking system has stabilized and federal insurance policies have forestalled runs on lending institutions. What remains is a coordinated and deliberate fiscal strategy to address our real economic ills. We need a $400 billion+ stimulus package, we need tax cuts, we need foreclosure relief, unemployment relief, and an orderly restructuring of the auto industry. All of these initiatives require legislative and executive collaboration. NONE of this can happen in earnest until January 20th.

The opportunity before Obama is profound, and I feel certain he will not shrink from it. Between 1933 and 1936, GDP rose from $577 billion to $790 billion, an advance of nearly 30%. This implies an annualized advance of nearly 7%. Over that time period the Dow climbed 334% or 35% annualized. It can be done.

I can’t take it anymore

History has conclusively proven that trying to time the market is an inferior investment strategy, especially given the volatility of the day. But for investors who find themselves hooked intravenously to CNBC and have perfectly correlated their emotional state with each tick in the Dow, I have this advice: Consider mental well-being over wealth building for the moment.

I believe you have options:

1)  Turn off the TV and do nothing – this would be my first choice.


2)  Consider substituting some of your stock exposure for corporate and higher yielding bonds. These instruments will trade in sympathy with equities, but with much lower volatility. And you can pick up a coupon while you wait.

3)  Raise cash. Consider cash the tariff for a mental vacation. If you do this immediately, construct a re-entry plan. We suggest re-allocating back into the markets, at specified intervals, between now and July 1.

Let me reiterate that I do not believe this to be a strategy borne of investment or financial planning rationale, but for psychological benefit. Ultimately, without your health, you have no wealth. If you have questions, call us.

Economists predict positive GDP for the second half of 2009. These estimates factor in Obama’s new New Deal (yet to be revealed). The cover of the most recent issue of The Economist magazine, picturing Barack, holds the simple title, “Great expectations.” Indeed. 

David S. Waddell

Senior Investment Strategist


Click here for more information on Waddell and Associates.

**This blog represents the opinion of W&A and is for informational purposes only. It is not intended to be construed as tax or legal advice by the recipient. Past returns of investment are no guarantee of future results.

***Any data reported in this blog has been compiled from the Wall Street Journal, Morningstar, Investors Business Daily, or various other informational internet sites.