Anatomy Of A Downturn

Quotes from The Hartford’s Chief Investment Strategist shed light on investor behaviour in uncertain times

To characterize the markets in first quarter of 2008 as “tough” is an obvious understatement. The New Year’s champagne was still flowing when market performance in the first week of January earned the dubious distinction of the worst in history, according to Standard and Poor’s. Since then, it’s been a bumpy ride as the credit crisis became a credit monster, claiming one firm – the venerable Bear Stearns – threatening others, and forcing public policy makers to take increasingly aggressive measures to right the ship.

Dr. Quincy Krosby, the Chief Investment Strategist of The Hartford, parent company of Harford Investments in Canada, has been watching these developments carefully and commenting frequently in the world’s media outlets on what it all means to investors. Quotes from the many interviews she provided in the tumultuous first quarter of 2008 – and in particular January – shed light on what can happen when fear grips the markets and the inherent pitfalls of focusing only on the short-term.

Below, in chronological order, is the anatomy of a downturn, through the eyes of Dr. Quincy Krosby:

Jan 4: "It's (an increase in the unemployment rate) probably the most important link in the economic chain, and if this continues, we're definitely headed for a higher risk of recession."

Jan 9: "The Fed will continue to lower rates regardless of what they say about inflation. If this market continues to deteriorate and be underscored by a sell first and ask questions later mentality, the Fed may have no choice but to deviate from its gradual policy of rate cuts."

Jan 11: "It's becoming very moot as to whether we are in a recession. Companies are telling you, the bond market is telling you and consumers are telling you – it's baked in."

Jan 14: "What you don't want to see is the psychological break, which may be happening right now. Right before a recession happens, you usually see a psychological break where you see CEOs cutting back on hiring and spending; and that creates momentum for a recession."

Jan 17: “This is a market rife with rumour and will turn on a dime. It is very much a panic, and the fear is that panics can develop a life of their own.”

Jan 18: “Recent trading feels like the ‘death by a thousand cuts’ that typifies a bear market. Every day the market rolls a bit more into negative territory ... and another group of leaders gets walloped."

Jan 21: “You're going to see bounces but overall it will be a big, big wave of selling. For the average investor, it is literally when you think you can't stand it one minute longer, you don't care what you lose, you call up and say 'Get me out.'”

Jan 22 : "Today I would just basically sit back, turn off the TV and do something else. Basically what we've been telling our investors, and these are people who are saving for retirement, is to continue dollar cost averaging with a portfolio manager who's got a good, good track record during volatile periods … The Fed is going to continue cutting rates. The economy is going to pick up. The financial crisis is going to heal itself. It takes time, it's painful, but it will be done."

Feb 15: “We're still at the cusp of recession and this (tax rebates) is an effort to get money out there, throw it from the helicopters and marry it with low rates in order to avert a recession, or if we are in a recession, to make it as shallow as possible."

Feb 18: "There's an old adage that fortunes are made in bear markets, but you just don't know it at the time. Investors should look for solid companies that are beaten down for no apparent reason and that will provide long-term opportunity.”

Feb 21: "People lose sight of the fact that this is psychology. The ultimate psychology is when you see people starting to horde. When you see people buying chickens and stuffing them into their freezer because they're afraid that the chickens are going to be more expensive the next time they go to the market, that is the ultimate manifestation.

Mar 3: “It's a treacherous market. Volatility spiked up today, and for our retail clients across America, we've been just telling them to adjust dollar cost average into this little by little by little, because they will make the inflection point when this market finally turns. But don't write one big cheque and think you're going to be a trader in this market. You will just be destroyed."

Mar 12: “The Fed is being creative and audacious. Any move that can help get the credit market working again and help staunch the domino effect we've been experiencing is going to be helpful ultimately."

Mar 17: "At the very heart of all this is a deteriorating housing market. And if they cannot get the values of the mortgages at least stabilized, the problems are just going to continue."

Mar 20: “What we're suggesting is to keep your eye on the financials because I think exactly the confidence is beginning to come back in. But is it one day, one week? We don't know yet.”

The moral of the story: Pay attention to investment fundamentals, look for long-term opportunities and seek professional guidance

Is there a clear message in all these quotes? There is. In fact, there are several.

  1. Retreats have always been part of investing. And the reasons they happen are always less important that the reaction, which, as Dr, Krosby intimates, are often irrational and typically reactionary – both anathema to sound investing. Furthermore, again as suggested by Dr. Krosby, even though it might take awhile every decline has historically been followed by an advance.
  2. Recessions equal opportunities. This view is not only Dr. Krosby’s: it’s an opinion also shared by respected money manager Bill Kanko, who advises Hartford Global Leaders Fund. As he states in his Q4 2007 commentary: “Stock prices have been weak. Business economics are giving way to fear, and many more opportunities are beginning to appear.”
  3. It’s almost impossible to predict when market will decline or advance. By the time we’ve figured out when the bottom is, the market is already on the way back up and you’ve missed an important opportunity for gain. As Dr. Krosby notes, writing a big cheque on a hunch that this is the right time is extremely dangerous. It’s far less risky to regularly invest smaller amounts over a longer period of time.
  4. Rarely are downturns restricted to a single sector. While the cause and solutions may be focused on one area, such as the financial sector, pessimism tends to infect the entire market. That’s the “domino effect” Dr. Krosby cites, and it means as an investor the search for a “safe” sector is misguided. The more prudent strategy is to diversify your investments to potentially decrease your risk.
  5. Speak to a Wellington West Investment Advisor. Uncertain times demand professional insight to keep you on track. Call your Wellington West advisor for an appointment to talk about how to best weather this current market storm.

Quotes used are from the following sources: Dow Jones News Service, CNNMoney.com, Bloomberg, Financial Times, BusinessWeek.com, Cossacks Breaking News, Associated Press, CNBC, CNBC.com, Fox Business, National Public Radio, “The Hartford” is The Hartford Financial Services Group, Inc. and its subsidiaries, including Hartford Investments which is theManager of Hartford Mutual Funds and a wholly-owned subsidiary of The Hartford Financial Services Group, Inc. of Hartford, Connecticut. The units of Hartford Mutual Funds are available only by prospectus and only in those jurisdictions where they may be lawfully offered for sale and therein only by dealers registered to sell such units. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that a Fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in a Fund will be returned to you.