Commentary: Surviving Mr. Market Volatility's wild ride

Daily Record (Rochester, NY), Jun 16, 2008 by Aiden P Hannan

What a wild ride it has been so far in 2008.

We experienced one of the worst first quarters in the stock market in a generation -- not the best way to start the year! Since then, the markets have stabilized somewhat and we've moved well off the lows seen in March.

All told, from the market high on Oct. 9, 2007 to the market low on March 9 (using the S&P 500 Index as our market benchmark) we were down 17.91 percent -- just a smidge away from an official bear market.

Other sectors (small cap especially) did crest that 20 percent and the correction threshold. Since then, however, the markets have rallied back in excess of 10 percent. Although mostly negative across the equity spectrum for the year-to-date period, we are much less negative than we were.

As of this writing, the economy, technically, still is not in a recession, which is indicated by two or more quarters of negative GDP growth -- but we are very close. A revised number in future months could easily tip the scale to recessionary levels.

In an effort to ease the global credit crunch and calm some of the stresses in the financial markets, the Federal Reserve has acted quite decisively by lowering the Fed Funds rate from 5.25 percent to 2 percent in only a seven-month period. The Fed also has attacked the problem in other ways, through such fancy-sounding programs as a Term Auction Facility, Term Securities Lending Facility and Primary Dealer Credit Facility (not to mention the assisted buy-out of Bear Stearns). Each of these are designed to ease the liquidity situation in the financial markets. The U.S. government has pitched in with the one-time tax rebate checks, which began arriving a few weeks ago. And much talk remains about increased regulation of financial institutions and programs to address the massive increases in home foreclosures.

While the markets appear to be in a better mood lately, there is still great unease out there. The fixed income and money markets have settled down somewhat -- bond spreads (the difference between U.S. Treasury and non-U.S. Treasury fixed income securities) have come in recently and the TED spread (the difference between three- month U.S. T-Bills and three-month Libor) has narrowed.

In general, market volatility, as measured by the VIX index, has retreated considerably since the middle of March. While we may not be at the end of the credit crisis, and housing woes will continue for some time, all of these are good signs of a calming market.

With the latest cut in the Fed Funds rate, the Fed has signaled that it may be the last time rates are lowered for a while. The latest inflation numbers came in somewhat lower than expected, with food and energy costs seemingly increasing on a daily basis, but the specter of higher inflation down the road is rising.

There appears to be little disagreement that a slowdown in the U.S. economy is well underway, and it may be a while before significant growth begins again. Global growth expectations also have dropped, although emerging economies still expect very healthy advances in the near term.

For those of us saving for retirement, or building wealth in general, we have been hit with the dual swords of lower home prices and lousy market-based returns -- a one-two punch of negative wealth effects. Is it any wonder consumer confidence is at the lowest point since 2003?

On the positive side for those in the accumulation phases, the money going into a 401(k) plan every two weeks is buying stocks "on the cheap." Valuations in the market look quite reasonable, across all market capitalizations and between domestic and international securities. Most prognosticators are saying lower-single to mid- single digit returns will be seen in 2008, with better returns in following years.

As I've mentioned in previous articles, we've been through times like this in the past, and we will fo through them again in the future. Keep your eyes on the long-term goals you set, and review them periodically to make sure you are still on track to meet them.

Aiden P. Hannan, CFP(R), AIF(R), is a vice president and trust investment officer with NBT Bank, which provides retirement plan investment services for clients of EPIC Advisors Inc. EPIC is subsidiary of NBT Bancorp Inc. and is a full-service retirement plan service provider with emphasis on 401(k) plans; 150 State St., Suite 200, Rochester, N.Y. 14614; (585) 232-9060; www.epic1st.com and www.401kTALK.com.