May 2009 Update
May 1, 2009
By Danny Mack
The month of April was very good for equity investors. All of the major indices had excellent positive monthly returns: the S&P 500 price return gained +9.39% while the S&P 500 total return gained 9.57%, the Dow Jones Industrial Average advanced +7.56%, the Nasdaq Composite added +12.40%, and the Russell 2000 returned a whopping +15.46%! Looking at these numbers, we as investors should be very excited because the rally has been led, in large part, by small cap issues. We know from studying bear and bull markets, that strong market rallies are often led by small caps, technology, and financials. This has been the case over the last few weeks. We should also point out that this rally has been very good in historical terms as well. The S&P 500 price return has gained 9.39% or more in only 31 of the 976 months since January 1928 (3.18% of the months). However, 19 of those 31 occurred in the 1920s and 30s. Another interesting tidbit is that in the 23 years from October 1939 through October 1962, no single month returned greater than 9.39%. Furthermore, April 2009 was only the second time since 2000 that the S&P 500 has returned greater than 9.39%, and only the 4th time since 1987. So this has truly been a great month to be investing!
Investors who may have been frustrated that we at Stadion missed some of the March market advances should remember that when the markets rise quickly it takes a little time for our model's internals to catch up and send a positive signal. But it is because of our disciplined adherence to this proven model that we are able to avoid severe market downturns, such as happened in 2008 (the S&P 500 total return was -37.00% in 2008). It is often difficult to conceptualize that missing most of the downside is often just as good, if not better than, missing some of the upside. For example, if an investor had lost 37.00% in 2008 (equal to the return on the S&P 500 total return) it would take a 58.73% return to get back to even. If that investor had only lost HALF of that (-18.50%), they would only have to return 22.70% to get back to even. That is a VERY big head start for the investor who did not take the bigger loss. So even if we miss a little bit of the upside, we are still way ahead because we missed so much of the downside!
The whipsaws we have endured have been frustrating, but luckily not as frustrating as if we had been fully invested in the markets the entire time. We know the benefit of tactical asset allocation comes at the cost of whipsaws. We can rest soundly at night knowing that our losses will be small and contained due to diligently following our rules based, technically driven model. As always, we strive to capture most of the good times, and miss most of the bad times.
As we mentioned in our last market update, we believed that this rally could have more staying power than some of the other short term rallies since this ongoing bear market started in October 2007. Our model is still signaling a very bullish market environment, so we are fully invested in all of our accounts, based on risk tolerance. However, even with our model signaling a strong market trend, we still have our defensive tactics in place, and if this rally doesn't remain, we will move to more conservative positions as warranted.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money. Investment return and principal value of an investment will fluctuate so that an investor's portfolio may be worth more or less than their original investment. The investment strategy presented is not appropriate for every investor and individual clients should review with their financial advisors the terms and conditions and risk involved with specific products or services. Stadion's actively managed portfolios may underperform during bull markets.