November 3, 2008
OCTOBER--THE DEEPEST CUT YET
If October 2008 wasn't the worst month on record for the capital and commodity markets, we'd hate to find out what is.
Indeed, September was an awful month, but October was a disaster. September's across-the-board losses for all the major asset classes suffered a repeat performance in October, only more so. The declines last month were in all cases bigger than September's, in some cases a lot bigger.
REITs suffered the biggest blow in October, falling a shocking 32%. But no other asset class was spared, including U.S. stocks, which tumbled nearly 18%, as per the Russell 3000. It was, to summarize the obvious, the worst month in memory, perhaps the worst in modern times. If you want to see what hell looks like in the investment game, October 2008 looks set to stand as a benchmark of the abyss for generations to come.
No wonder, then, that our measure of the global market portfolio index slumped 15.7% last month--the fifth straight month of losses, and the biggest one yet.
Diversification, to put it simply, did not work in October--the second month running that the global markets repriced risk downward via a broad wave of selling. The lesson is that the pool you're swimming in will dictate how--or if--you swim. One can't extract blood from a stone, or positive returns from risk of any kind in a financial calamity. Clearly, the pool has been battered by gale force winds for two months running and the effect has taken a hefty toll on the various components. When risk begins to pay off, the waters will turn calm, but for now investors are knee-deep in the act of wound licking. Perhaps one can be thankful at having any assets left to mourn over.
As for the global markets index, the best we can say is that compared with the defaults, bankruptcies and the complete evaporation of assets in some corners of finance, the red ink afflicting GMPI looks mild. But by any reasonable measure of absolute standards, there's no way to downplay the fact that risk of any type has inflicted sharp losses on investors. Other than cash, there's been no place to hide. When a generational storm of unwinding and correction hits, the usual rules take a holiday.
Will this sorry state of affairs continue for a third month running? No one knows, although it's hard to imagine that everything keeps tumbling. The extraordinary liquidity-injecting efforts of governments around the world--with yet more coming--is starting to show signs of success in at least stabilizing markets. Or so it appears. Outright panic seems to have, temporarily at least, ceased. That's progress in this environment: stop the massive bleeding. The panic has been replaced with a sober wariness about the future, including the recognition that repairing the financial system and managing the economic contraction will take time and money. Perhaps that keeps asset prices from another month of sharp losses, perhaps not.
Meantime, we've all received a lesson in humility, starting with the now-painfully clear lesson that risk can inflict much, much more pain on investors than many thought possible. So it goes after living through a generation of relatively easy and smooth gains.
Posted by jp at November 3, 2008 9:38 AM