Usually the economic news is relatively light on the weekends, but this weekend has been filled with news. Most notably is the news that JPMorgan Chase is buying Bear Stearns for a mere $236 million. This is significant when you consider that just last year, their stock was trading for around $150 per share, giving Bear Stearns a market cap of over $18 billion.
The shares have been declining since last summer, and BSC has dropped from $150 to a measly $2 at the buyout. When you think about the ability of a company worth tens of billions of dollars to become almost worthless in a matter of months, you have to be slightly concerned that this could happen to more companies as well.
Analysts argue that a a complete collapse of Bear Stearns would have virtually destroyed any lingering confidence in the financial markets, but I think the damage has already been done, whether Bear Stearns went bankrupt or not. The simple fact that this company has gone from one of the biggest investment firms on Wall St. to the equivalent of a penny stock will shake any confidence that was left, regardless of being saved from bankruptcy by another firm.
The Fed Takes Action
In an attempt to ease this situation, the Fed cut the discount institutional lending rate from 3.5% to 3.25%. This may be appropriate action, but the markets have not responded positively to the news. This small drop in rates has little effect when the U.S. dollar continues to fall and oil prices continue to set new records.
Where Are We Headed?
Things aren’t looking good, but where do we stand in the big picture? Well, even with a poor start to the year where the S&P 500 is down around 12%, we have to look back at the years prior to put things into perspective. If we look back at the S&P starting in 2003, it has returned 28.5%, 10.7%, 4.8%, 15.6% and 5.4% in 2007. So over the past five years, most people who are invested primarily in equities have probably seen somewhere between a 40-70% total return. This puts the 5-year annualized return somewhere around 12%, which is a tad higher than the long-term historical average of the stock market.
That being said, it makes the 10-20% losses that most people have seen in the past six months not seem quite as bad. Of course, when you lose that much in such a short period of time and only see your quarterly statements, it can seem a bit rough, but you have to keep in mind that these same investments were doing fantastic over the previous five years, so it isn’t the end of the world.
Of course, we don’t know how long this will last, or how bad the losses will be. Some have said that we’re approaching the bottom of the housing market, while others are still saying we’re in for a nasty recession. It is impossible to know who to believe, and to try and shuffle your asset allocation around in reaction to what has already happened in the market is a dangerous game. Develop a portfolio that suits your time horizon, investment objectives, and risk tolerance, and consistently add to your investments over time. You will be rewarded, even if it doesn’t seem like it right now.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.