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The market staged a huge rally March 18, and though that one quickly sputtered out, stocks will keep on trying. But these efforts aren't likely to mean much.
If the market is poised to fall further, as I suspect, cash is just about the only defense. And that's where I'm taking more of my model portfolio of exchange-traded funds.
"I think you've probably seen what amounts to the bottom of a bear market correction," says Steve Leuthold, the manager of Leuthold Core Investment (LCORX), an asset-allocation fund. "I think this rally will probably carry (the S&P 500 Index ($INX)) up to 1,400 or 1,425. But I don't think we're done with the bear market. I think that will come between late spring and early fall, depending on the length of the recession."
As the first quarter came to a close, the S&P 500 was languishing around 1,300. My MSN Money model ETF portfolio finished the period down 9.4%, by far the worst quarterly performance since it was launched at the end of 2003, though it beat the market's 10.1% decline.
Perversely, even the fund I added at the end of 2007 to fight such a downturn failed me. It is Select Sector SPDR-Utilities (XLU, news, msgs), which represents a sector that's supposed to be defensive. Alas, it tumbled 11.4% in the period, so I'm selling it and holding the proceeds as cash.
Even bonds have disappointed us in the current environment, owing to the incompetence of the Federal Reserve, first under Alan Greenspan, the architect of the housing bubble, and now under the influence of "Helicopter Ben" Bernanke, who by throwing yet more money at the problem has managed to create stagflation.
I think we'll finish 2008 on a higher note, but I expect punishment in the meantime.
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Bad-news bear-er
The first quarter, which for MSN Money production reasons is the period from Dec. 19, 2007, when I closed the books on the model last year, to March 19, has furnished a drumbeat of bad news, culminating in the collapse of Bear Stearns (BSC, news, msgs) in the closing days of winter.The damage inflicted on securities was widespread.
| Fund | Shares | March 19 price | Value | % change in Q1 | % of portfolio |
|---|---|---|---|---|---|
370 | $56.72 | $20,986 | -10.8% | 14.7% | |
1,005 | $19.84 | $19,939 | -17.1% | 13.9% | |
225 | $60.25 | $13,556 | -13.7% | 9.5% | |
83 | $122.61 | $10,177 | -4.8% | 7.1% | |
184 | $37.83 | $6,961 | -11.4% | 4.9% | |
349 | $68.67 | $23,966 | -9.0% | 16.7% | |
83 | $88.62 | $7,355 | -12.3% | 5.1% | |
198 | $43.33 | $8,579 | -15.8% | 6.0% | |
210 | $77.80 | $16,338 | 2.2% | 11.4% | |
99 | $78.64 | $7,785 | 0.2% | 5.4% | |
Schwab Money Market Fund | $7,447 | 5.2% | |||
Totals | $143,091 | -9.4% |
After the March 19 close, I sold the Utilities Spider and added the proceeds to cash, bringing that to $14,408, or 10.1% of the portfolio's assets. In coming weeks, I'm expecting the market to dive toward a total loss in this bear cycle of around 25%. That would be the average of losses in recession-linked bear markets since the end of World War II. At its worst so far, on March 10, the S&P 500 was down 18.7% from its peak last Oct. 9.
Recipe for stagflation
Recessions can become official only with hindsight, but we are currently experiencing the kind of economic shrinkage that the term describes. It was precipitated by the collapse of credit in the wake of the subprime-mortgage mess, which has so eroded home values that as many as one American homeowner in every 10 owes more on their loans than the property is worth.The economy shed 63,000 nonagricultural jobs in February, the second decline in a row. The Manpower Employment Outlook Survey (.pdf file) found that only 14% of employers surveyed plan to hire workers in the second quarter, down from 17% in the first period.
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In response, Fed Chairman Bernanke has lived up to his "Helicopter" nickname by tossing out money faster than it could be counted. The bailout of Bear Stearns alone puts the Fed on the hook for liabilities that, considering the company's 30-1 leverage on its $11 billion of assets, could exceed $300 billion.
So even while employment was going down (recession), prices were going up (inflation). Gold topped $1,000 an ounce, and oil spurted well above $100 a barrel. Agricultural commodities are trading at historic highs. In this regime, called stagflation, even bonds provide no refuge.
Continued: Commodities look pricey
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