Now that the equity market has recovered from its lows that were reached during the worst financial crisis since the Great Depression, investors, as is common in such a time, are wondering if it might be a good time to get out of the market and lock in their gains. In this article, we revisit what we’ve been through and how current conditions compare to those of the past. Based on many very dynamic drivers of the economy, and current valuation levels, we believe that now would be the wrong time to get out of the market. We are emerging from one of the longest recessions and remember the steepness of two painful bear markets; we are now starting to experience a broad-based recovery. A series of recessions, painful bear markets and terrorist acts since January 2000 has tested our resilience on many levels.
In the chart below we identify key turning points in the S&P 500 for the period of January 2000 through March 28, 2013.
We began 2000 as the market was peaking with the technology bubble which was soon followed by a bear market made more acute by the September 11, 2001 terrorist attacks. It has been a long 13 years to get back to the market levels of early 2000. The technology-driven NASDAQ still has to climb 54% to recover its March 2000 high of 5,048.62.
Along the way we have engaged in wars, had natural disasters, a European sovereign debt crisis, and a series of dramatic deadlines in the U.S. over the budget, debt ceiling, spending cuts and tax rates which continue to frustrate us. After what we’ve been through, it is easy to be pessimistic, and it is a challenge to remember what it is like to be in a better state of affairs. It took seven years to see market levels recover to 2000 levels, with October 2007 giving way to a credit and liquidity crisis created by easy lending and complex investments, the collapse of the real estate market, and massive government intervention on a global scale.
In the chart that follows, we compare the total return of the S&P 500 to the Wescott Equity Model for the period of January 1, 2000 through March 31, 2013. Wescott’s globally diversified portfolio and our exposure to companies of all sizes has contributed to our outperformance of the S&P 500 Index of large companies. Please note that returns of the S&P 500 reflect no trading and administrative costs. The Wescott returns are net of our managers’ fees and expenses.
As the technology bust unfolded, we were well positioned with value style managers, including non-U.S. equity managers, and had exposure to smaller companies, which helped us to limit the impact on our clients. During the market recovery through 2007, our performance came from our allocation to non-U.S. equities, our exposure to the emerging markets, and our allocations to small and mid-cap companies.
While our allocation to non-U.S. equities has not contributed in recent years, our long-term results come from a discipline of being diversified by size, style and geography. We believe that our portfolio is well positioned for a recovery in non-U.S. markets. According to Ned Davis Research, the world’s stock market, excluding the U.S., remains 29% below its 2007 level. We do not see an overheated market; we see a market cycle with significant opportunity going forward, however, it will not be a smooth climb. Markets reach new levels by moving forward and pulling back, and repeating the cycle.
In Table 1 that follows, we summarize the various market cycles since the beginning of 2000, comparing the S&P 500 Index to the Wescott Equity Model portfolio during each phase, and for the entire period through March 2013.
Compared to 2000, valuations are much more attractive today, balance sheets are stronger and profits are at record highs. Corporations are holding a great deal of cash and they are providing guidance on higher capital expenditures. Merger and acquisition activity is picking up as businesses deploy cash to expand their reach.
In Table 2 below, we provide comparison about valuations and metrics between the market top of early 2000 and where the equity market stands as of March 31, 2013.
We do not know what adventures and challenges lie ahead, but we are hopeful that the next decade will have as a foundation all the work and innovation of the past 13 years. The Wescott Equity Model is positioned to benefit from the many positive factors we see percolating in the economy. There is no one sector driving market returns; developments in housing, energy, health care, technology and manufacturing are improving standards of living and providing investment opportunities.
The opinions expressed herein were formulated based upon facts and conditions known as of April 2013. Subsequent changes in facts and conditions affect our analyses, opinions and actions.
An original article authored by the Investment Research Group of Wescott Financial Advisory Group LLC
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