As you are likely aware, Wall Street has been undergoing shock therapy in the last couple weeks. From the failure of Lehman Brothers, to the emergency loan for AIG, to the Treasury’s proposal to spend upwards of $700 billion to buy troubled financial assets, last week was an unprecedented week for the U.S. financial system. And as of yesterday (9/22/08), Wall Street has essentially ceased to exist, with the two remaining powerhouse investment banks filing with the FDIC to become banks. What does this mean for investors? We’ll be working overtime trying to make sense of all the financial mayhem, but for now, beyond the panic-stricken headlines lie some interesting nuggets of wisdom.
For example, despite record-setting volatility, the S&P 500 actually finished the week with a gain. The Fed’s rate-setting committee decided to make no changes to its target funds rate. And the business prospects of so many companies did not change.
While so many things have gone wrong, it could be a lot worse. Given that the U.S. has been the root of most of the world’s financial turmoil, it would be logical to assume our stock market has taken the brunt of the pain. As it turns out, only a small handful of markets have outperformed ours. Here’s a list of the world’s most important markets, ranked by year-to-date performance, through 9/22/08:
S&P 500 (U.S.) -17.8%
U.K. -20.0%
Japan -20.6%
Australia -21.4%
Germany -24.2%
France -25.9%
Singapore -29.5%
Hong Kong -33.3%
India -34.9%
Russia -42.8%
China -57.5%
Europe overall -25.3%
Emerging markets -33.0%
As we “go to print” today, the core stocks are beating the market handily this year, with 10 of 23 stocks actually up for the year. The list of up stocks would shock you (Home Depot is up! Wells Fargo is +39%). There are some obvious stinkers among the core stocks, but once again the benefit of diversification is confirmed.
Truly, these are the times that try mens’ souls. But they beckon us to fall back on the basics of investing: diversification, quality, and owning for the long-term. Things will get better. Messes get cleaned up, and usually those that do the cleaning get rewarded handsomely. While it’s a shame that the private market isn’t fully capable of doing the cleaning itself, requiring the government to step in, there will still be some very big winners among corporate America.