November 3, 2008

Dear Investor:

By now, we are sure you have watched reports of the market crashes around the world.  These losses have touched virtually every investor and, unfortunately, our clients are included.  As you know, we at CapTrust advocate diversification by investing in stocks, bonds, commodities and real estate.  We have believed that this diversification will help you achieve a smoother return.  However, this strategy cannot work when all prices of all assets go down at the same time.  This is called deflation.  Unfortunately, that is what has happened in recent months.  We are now entrenched in a worldwide battle to fight this off.  Deflation is scary because if everyone believes prices will continue to go down, everyone will wait to buy goods and services, and our economy will falter. 

There is little doubt that, on average, investors in October suffered their largest monthly losses ever.  The S&P 500 stock market index fell almost 17% for the month, the worst month since October, 1987 and the second worst since the beginning of World War II.   The international stock markets sunk even more.  Commercial real estate and oil prices decreased more in one month then in any other month ever recorded.   Not even gold was a safe place to park your money in October.  It fell more than 18%!  In response, many investors sought refuge in the safest asset known – U.S. Treasury Bills.  Right now, only the U.S. Government can be trusted to pay.

But enough of the negative news.  When errors occur simultaneously in government policies, corporate responsibility and consumer/investor behavior, markets will fall.  This has happened in the past and it will happen again in the future.  So rather than ramble on about how (possibly) these events came to be, we want to focus on your most important question:  What should you do now?  To help answer that question, we investigate the two other most miserable periods in the stock market’s recent history.   Each offers a unique perspective.  The first, the 1930s, was a deflationary period and the second, the 1970s, was an inflationary time.

The Great Depression is a particularly frightening time to recollect because the legendary stories of failure during this era still haunt our collective psyche.  For the ten year period of 1929 – 1938, the S&P Stock Index fell almost 9% and, so far, represents the only decade in history in which an investor in the stock market would have actually lost money.   

So what happened in the stock market during the next 10 years after 1938?  Remember, as is happening now, many investors fled the markets during that time and either put their money under their mattresses or in U.S. Treasury Bills.  Here are the annualized returns of the S&P Index, U.S. Treasury Bills and inflation during these 10 year periods:

Source:  2008 Ibbotson Stocks, Bonds, Bills & Inflation Classic Yearbook

What a trap!  Investors that fled stocks for the safety of Treasury Bills during the Great Depression were very regretful in the following 10 years.  Not only did Treasury returns decrease but inflation soared.  Stocks were clearly the place to be from 1939 – 1948 .

Now, let’s look at another perilous 10 year period:  1965 - 1974.  Many of you will remember this frustrating time.  It seemed, like now, that the stock market went nowhere.  Meanwhile, inflation skyrocketed.  Here are the same statistics for this period as well as for the ensuing 10 years:

Source:  2008 Ibbotson Stocks, Bonds, Bills & Inflation Classic Yearbook

Another trap!  For sure, 1974 was a dark period and it was difficult to muster faith in our future.  A paralyzing oil embargo and a scandalous White House were the tragic stories of the times.  Nonetheless, disgusted investors in 1974 would have made a big mistake by selling stocks and buying Treasury Bills.  Inflation got worse and the only way to have stayed well ahead of the soaring cost of living was to have been in stocks. 

If 2008 were to end now, here are the statistics for this 10 year period:

Source:  2008 Ibbotson Stocks, Bonds, Bills & Inflation Classic Yearbook

What a decade we have endured.  The past 10 years in stocks may actually end up being worse then the Great Depression!  Also, if we are successful in snuffing out the recent deflation threat, what do you think may happen to the inflation rate after so much money has been pumped into our economies by worldwide governments?  Will U.S. Treasury Bills become a trap again?

These reviews of history help us conclude that, contrary to the state of the world right now, investors should now be increasing their exposure to stocks, not decreasing.

We hope this provides some refreshing contradictions to all of the negativity about our future that is so hard to avoid in our media.  We are not blind optimists, however.  We are aware that markets fall 40% because something is terribly wrong.  We face certain hardships, just like our country did in the 1930s and in the 1970s.  Ironically, it is actually surrounding these tough times that stocks often rise quite substantially.  We at CapTrust are grateful to be able to provide you personalized investment services.  We are excited about what the future brings for investors.

Sincerely,

Charles W. Manning                                       Mark J. Manning