Price DOES Matter

George Hosfield, CFA, is Ferguson Wellman’s chief investment officer and chairs the firm's Investment Policy Committee. In addition, he is a member of the equity team with responsibility for management of the consumer discretionary sector on a global basis. He is a principal of the firm.

- On Friday, September 26, with the S&P 500 down 17 percent for the year, we sent an internal email entitled, “Has Anything Changed?” The memo concluded that the turmoil in the credit markets coupled with the increased likelihood of a synchronized and protracted global recession had not yet been fully discounted. As such, we stated that we would “use any rally associated with the unveiling of the rescue plan as an opportunity to reduce equities.” Our intention was to make a reduction in our equity allocations. The following trading day (Monday, September 29) the market tumbled a stunning 777 points, and unfortunately the opportunity to get in front of a material correction did not present itself.

- On October 6, an Investment Policy Committee communication titled “Where Do We Go From Here?” was sent to clients. At that juncture, the S&P 500 was down 28 percent. This dispatch stated, “though such levels are historically not the best times to reduce equity exposure, with evidence mounting that this will not be a typical correction, in the interests of capital preservation we are initiating trades that will not only reduce the allocation to equities but also position the remaining equity portfolio more defensively.” In short, we had devised a plan to sell/reduce some of the more cyclical stocks and hold the proceeds in cash. Our strategy was to make a series of incremental sales (2 to 3 percent at a time). Unfortunately, at this juncture, the trades that we initiated earlier in the week have proved to be prudent. In fact, in hindsight we should have sold even more.

- In recent days market anxiety has reached panic levels and as of this writing, the S&P 500 has now fallen 42 percent on the year. Clearly this recent leg down in the market has had almost nothing to do with the underlying fundamentals and more to do with emotion, and a lack of confidence in the viability of the financial system. The shares of most high quality companies have now been indiscriminately marked down to near depression-like prices. Though our outlook now calls for a recession that will be global and extend well into 2009, at current prices we are no longer sellers of equities and are now in fact looking for opportunities to selectively buy.

- Though it is impossible to call an exact market bottom, with the material and coordinated response from global central banks that is now being applied, the foundation is being laid for a thawing of the credit markets, and with that, renewed investor confidence. Undoubtedly, volatility will remain extremely high and we fully expect any rallies in stocks to be followed by an inevitable process that retests recent lows. However, at this level, equities are too cheap to sell.

As always, please do not hesitate to contact me or your portfolio manager with any questions or comments.

Best regards,
George W. Hosfield, CFA

Chief Investment Officer