1997 All Over Again

Ah 1997…it seems like only yesterday when Jewel was on the Billboard charts, Frasier dominated network television, the movie Titanic swept the Academy Awards and the dot-com bubble had not yet fully inflated. 1997 was also the last time that stocks were at these horrifying low levels. Yesterday investors continued to sell stocks as fears mounted that commercial real estate would be the next shoe to drop as the economic outlook darkens.

The S&P 500 plunged to its lowest level since 1997, sliding 6.7% to 752.44, under the low point of 776.76 reached during the bear market nadir in October, 2002. The index extended its 2008 year to date loss to 49% and is poised for the worst annual decline in its 80-year history. The Dow Jones Industrial Average sank 444.99 points, or 5.6%, to 7,552.29. The Nasdaq Composite decreased 5.1% to 1,316.12. Financial companies led the way again, with Citigroup down another 26% to $4.71 (yes, that’s Citi under a fin!), JPMorgan Chase lost 18% to $23.38, Bank of America tumbled 13.86% to $11.25 and Morgan Stanley was off 10.24% to $9.20.

Yesterday’s catalyst was more of the same—data that indicated that we are in a bruising recession. Weekly jobless claims approached the highest level since 1982; the index of leading economic indicators fell for a third time in four months; and the Federal Reserve said manufacturing in the Philadelphia area shrank at the fastest pace in 18 years. As investors rushed for the exits, they poured money into US Treasuries, driving prices to historic highs. The yield on the two-year note fell below 1% for the first time, while ten year yields fell to 3%...my friends, you can now lend the US government money for ten years and earn a whopping 3% for your troubles!

A client asked me, “How do you know when to just get out?” My answer is that when fear is shaking you to the core and it feels like all confidence is lost is usually when long term investors should be dipping their toes into the water. I am not suggesting that you sell the farm (how much could you actually get anyway?) and jump into stocks, but there are some compelling values out there. It is likely to remain pretty messy in this period, but that does not mean that you should throw in the towel on capitalism. Gather your thoughts, chug a little Pepto Bismol and don’t run for cover just yet.