With hardly any warning, just when investors were finally  beginning to recover from the post traumatic stress syndrome still lingering from the 2008 crash, the familiar nauseating, sinking feeling has once again taken hold of some of you who, (unwisely) monitor your portfolios and the markets daily.  

If you are nearing panic and hoping the roller coaster will stop and let you off, I have these thoughts to offer you.  Unsettling as the current market situation is, this is not  2008 all over again!

Yes, there are parallels and much cause for concern, but there are profound  differences between the underlying fundamentals then and now:

Companies Are Lean and Cash Rich

• Corporations today are highly profitable, and earnings results continue to exceed expectations.  

• Inventory levels are much lower.

• Companies have streamlined costs and built massive cash balances. In the US (where we have the longest data series), cash as a percent of assets is now at the highest level since the early 1960s.  

Financial System Is Better Prepared

• Bank balance sheets, particularly in the US, are in better shape than they were in 2008.

• Capital ratios are much stronger, providing a cushion to cover loan losses.

• Interest rates in most developed economies remain at historically low levels.  

• Liquidity support facilities remain in place around the world.

• The US Federal Reserve committed to keeping interest rates low at least through mid-2013 (while another round of quantitative easing appears more likely), and the European Central Bank has eased off from its more hawkish tone.

Oil Prices Are Much Lower

• ­Oil prices today are significantly lower than in 2008, providing an effective tax cut for consumers.  WTI light sweet crude prices are near $80 per barrel, versus $140 in mid-2008. 

• Commodity prices broadly have declined, which should relieve inflationary pressures on emerging markets.  It should also reduce corporate input costs, bolstering margins.

Consumers Have Slashed Debt

• Consumers have deleveraged significantly since 2008.  The ratio of US household financial obligations to disposable personal income has declined to levels last seen in the early 1990s.

There Will Always Be Market Corrections and Declines 

Yes, this is a familiar feeling. You  have been through this before and  you will experience it again.  There is no avoiding the reality that markets are cyclical and that attempting to time the markets, in most cases, does not optimize long term returns. You weathered the devastating tech bubble and matured as investors. You realized that risk adjusted diversification helps to protect an investor from the idiosyncratic  disasters that can occur in a single sector. You weathered 2008, by sticking with this same basic principle and tweaking your allocation levels. Hopefully, you have learned from those two experiences that staying invested and not reacting emotionally by selling at market lows were the keys to positioning your portfolio for potential recovery of your losses.

Volatility Factored Into Portfolio Design

We recognize the difficulty in predicting the action of governments, regulators and central banks, and we carefully weigh these uncertainties in determining our portfolio selections and position sizes. Your portfolios are designed with strategies for long term growth and to provide for you throughout your lifetimes. In order to lessen the impact of market volatility and downturns, we include  sectors and hedging vehicles, not correlated (historically) or inversely correlated  to equity markets. These alternative investments include real estate investment trusts (REITS) and funds using absolute return strategies for example, as well as principal protected and/or income insured annuities.

Historically, down markets have eventually  created opportunities for those who can rise above their gut reactions and fears and continue, instead, to  steadfastly   rely upon a more rational approach.  

It may be extremely challenging, but now is the time to remain focused on the fundamentals and to maintain a long-term perspective.

And, as always, we remain focused on serving the best interests of our clients by rebalancing and tweaking allocations as market conditions dictate, but, more importantly, by not veering from the sound,  risk adjusted long term allocation strategies that are in place. We believe this offers the best opportunity to  potentially meet long term goals.