Records were broken in 2008 - money-losing records from an investor’s perspective.
U.S. stocks will record their worst calendar year since 1931. As measured by the S&P 500 Index, the broader market tanked 40% this year while the Dow Jones Industrials fell 36%.
U.S. stocks are already “dead money” since 1996. They’ve shown no net gain at all - including dividends. The ongoing market environment is eerily similar to another period of dismal returns - from 1966 to 1982. During those 16 years, the Dow and S&P 500 Index posted zero profits. Adjusted for soaring inflation, the markets actually recorded a loss.
Global equities as measured by the MSCI World Index posted its worst year since inception in 1969. International equities fared even worse with European and Japanese stocks down more than 45% and the MSCI Emerging Markets Index clobbered - down 53% in 2008.
World Markets Got Trashed in 2008
For stocks, the ongoing bear market has resulted in record mutual fund outflows as investors continue to dump their holdings and run for cover into money market funds.
Unfortunately, money market funds are now paying barely any yield at all since the Fed slashed interest rates to effectively 0% on December 16.
Only Treasury bonds, European and Japanese government bonds yielded a profit for investors in a wickedly harsh year for investors. As a currency investor, naturally you already know that the Japanese yen was also a winner against the dollar and euro as the “carry-trade” came to a crushing halt.
So Much for “Diversification”
With the exception of super-safe and low yielding U.S. Treasury bonds, yen and gold, the entire gamut of assets from stocks to non-Treasury bonds all plummeted in 2008.
Commodities, certain currencies, fine art and hedge funds all succumbed to brutal price declines. Overall, 2008 was the first losing year for U.S. and global stocks since 2002 and the worst period to be invested in financial and hard assets in more than 75 years.
Stop-losses rang out like pinball machines in 2008. Diversification across sectors, industries, countries and currencies proved futile. Almost everything was pummeled. By October 10, a panic gripped world markets as the threat of systemic collapse threatened the viability of the banking system.
Chaos to the Rescue
In late 2007, I introduced the TSI Chaos Portfolio to my Sovereign Society readers. It’s a U.S.-based portfolio of six equally-weighted investments, including short-term Treasury bonds, gold, Japanese yen and reverse-index funds that bet against the S&P 500 Index. Recently I added a seventh safe-haven - short-term German government bonds.
This cost-effective strategy dominated my recommendations in 2008 rising more than 17%, including dividends.
For growth investors, hedging your market exposure is vital in a secular bear market. I continue to like the TSI Chaos Portfolio in 2009 even though the stock market has probably suffered the bulk of its declines at this point.
Volatility will remain rampant in an uncertain economic environment marked by growing consumer credit woes, massive government bond issuance to support gargantuan fiscal spending plans and weak corporate earnings. Investors must hold downside market protection.
Short Most Commodities, But Stock Up on Gold/Silver
Starting in October 2007, I recommended my Commodity Trend Alert (CTA) subscribers begin to bet against oil and gas stocks as a way to hedge against the energy sector. At the time, oil prices were racing to US$100 a barrel and the oil stocks were in the midst of a multi-year bull market. We all know how that story fared in 2008.
Since peaking in July, the benchmark CRB Index has crashed more than 50% as the entire commodities complex continues to aggressively deflate in a rapidly slowing global economy.
To protect our natural resource exposure in CTA, I immediately issued a series of reverse-index purchases betting against commodities. We were most successful betting against industrial metals or base metals, as copper and other metals collapsed. That position, still open, has gained a cumulative 80% since August 2008.
And since September, CTA has been riding a broad commodity index to the basement as part of our reverse index strategy - up more than 60%. We also maintain hedges against gold, oil, gas and long-term Treasury bonds.
Gold has also been a strong performer compared to most other assets in 2008. Significantly, gold is the only asset that is completely outside the credit system and the only asset that has no liability.
In 2008, spot gold prices gained a modest 1% - not much in absolute terms but certainly impressive compared to other plunging assets. Silver, more of an industrial metal and therefore more vulnerable to broad economic trends, declined 18%.
Looking ahead to 2009, growth investors will only reluctantly return to stocks. Losses have been massive for investors since late 2007 as mutual fund redemptions hit records.
Stocks might indeed offer better values compared to mid-2007 after plummeting more than 40% from their highs. But domestic consumption in the United States, Japan and Europe is depressed and likely to remain under threat as unemployment rises and savings rates begin to rise again.
The correlation between a higher savings rate and corporate earnings is negative. It’s difficult to be bullish on earnings when the world’s largest economy will remain mired in a period of sluggish growth, debt retrenchment and rising job losses. The same is true for Japan and Germany - the second and third largest economies, respectively.
This is not the time to be aggressively buying stocks. Odds are prices will get cheaper again following any bear market rally. That’s certainly been the case every time stocks have rallied off their lows since October 2007.
Instead, make sure your portfolio includes gold, portfolio hedging strategies and income from high quality investment-grade corporate bonds in 2009.
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