What do the Grand Teton Mountains and the stock market have in common?
That thought occurred to me as my faithful assistant back in Atlanta asked in a phone call, “Did you see what the stock market did today?” At the
time, I was on the back patio of the Jackson Lake Lodge in Wyoming’s Grand Teton National Park gazing across Willow Flats and looking at a postcard view of magnificent mountain creations.
“Yes, I did see what the market did yesterday,” I replied. Given the omnipresent Fox and CNN news channels, and USA Today, it was easy to keep an eye on the gyrations in global and U.S. stock markets. So what does that have to do with mountains?
Eight Teton peaks in the 40-mile long range exceed 12,000 feet and one, Grand Teton, rises a spectacular 13,770 feet. Relatively young mountains
geologically speaking, the Tetons formed millions of years ago when the earth cracked along a north-south line of mound-like hills. As the outer crust of the earth faulted under pressures from deep within its mantle, the western side of the fault line tilted upward, creating the rugged and spired peaks we
see today.
The eastern side of the fault block sank, creating a downward-tilting landscape that early fur trappers called a “hole,” in dramatic contrast to the up-thrusting mountains. Originally called Jackson’s Hole after David Jackson, who trapped beaver in the valley in the 1830s, the possessive was dropped, hence, today’s name, Jackson Hole.
Geography and the behavior of stock markets are analogous. Western landscapes dazzle, with soaring peaks next to deep canyons and valleys. Snow patches and glaciers adorn mountains even as volcanic vents and geysers produce boiling hot springs of “smoking waters.”
Look at the jagged profile of the Teton Range and you may see similarities to a stock market chart over time. Peaks. Valleys. Like a water-filled steam vent, tensions build in a given stock, sector, or index, until a geyser erupts and a blowoff relieves the pressure, settling things down until the next bubble. Hot in one place, cold in another. On one day you are walking a bucolic path next to Jenny Lake in the cool shadow of Mt. Moran. On another day you are wandering around the dry, hostile Badlands of South Dakota with afternoon temperatures up to 105°. Like the west, Wall Street can present a tableau of extremes and contrasts, and of dangers and opportunities.
On Thursday, August 16, 2007, major U.S. market averages achieved 10% corrections from recent highs. On average, the stock market over time goes up roughly 70% of the time, down 30% of the time. These are not bad odds—over time! The problem was that the S&P 500 Index had gone 4½ years without a correction of 10% or more. Complacency can be as comforting as the sound of water lapping at the shores of a mountain lake— until the thunderstorm hits. “Risk” was not being properly priced until the sub-prime squall line blew through to clear the air in financial markets.
Is it over? Market averages have recovered slightly as of this writing on 8/21/07 but it is foolish to suggest that we can divine the future. The Market Crash of 1987 and the slump in 1998 both occurred after a nervous and volatile July and August. Our advice then was the same as it is today, i.e., “Don’t let headline-driven emotions trump a rational long-term strategy.” Investors who remained on point in 1987 and 1998 saw markets recover within a reasonable period and continue the march to new highs.
On August 25, 1987, the Dow Jones Industrial Average hit 2,722, a yearly high. On October 19, 1987, a 508-point crash (down -22.6% from the previous trading day close) startled investors with a drop to 1,738. By February 2, 1994, the Dow reached 3,975 (up +129%) from 1987’s Black
Monday. Despite the 1998 downdraft, the Dow surpassed 10,000 on March 29, 1999. In the post-9/11 stress, the Dow bottomed at 7,702 on July 23, 2002. Despite the storms of early August of this year, on 8/21 the Dow closed at 13,090— up +70% from the 2002 bottom. Peaks. Valleys. Upheavals. Hot. Cold. The geography of markets and of the west offer contrasts in risk and reward.
In the recent downdraft, the trailing price/earnings (P/E) ratio (a measure of relative value) of the median S&P 500 stock dropped to 17.2 times, versus over 19 times on July 19, 2007. Ned Davis Research notes that over the last 35 years, the S&P has gained an annualized average of 11% when the P/E ratio is under 18. (Source: Barron’s, 8/20/07).
A recent survey of global money managers indicated that 93% do not see a recession as likely in the next 12 months, and the majority view the
current discombobulation as a likely buying opportunity (Ibid).
The scramble for safe refuge has pushed down yields on U.S. Treasury paper. On 3/21/07 yields on 3-month T-bills were 3.58%. On 10-year T-bonds, which serve as a benchmark for the mortgage market, yields were 4.59% on 3/21/07. For those with reasonable credit scores, mortgage money is available at attractive after-tax rates. As I watched dramatic thunderstorms move across the face of the Teton’s, rays of sunlight broke through the dark clouds and blue skies eventually returned.
Nature operates in cycles that vary in intensity and so does the marketplace for stocks, bonds, and other financial instruments. Prudent financial planning will incorporate strategies to help you weather the storms. Yea, though I walk through the Valley of Wall Street, it is good to carry a poncho!
Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies.
Posted by bondsblog as Financial Planning with Lewis Walker at 8:00 AM EDT