It has been one of the most eventful six-month periods in stock market history. The FTSE 100 is 'only' down 4%, but it could have been so much worse.
We're half way through the year. And what a six months it has been. In terms of the stock market, you could split it into two halves…pre-March 9 and post-March 9.
The Bust
The FTSE 100 started the year at 4,434, having fallen a portfolio-wrecking 31% in 2008. At the time, many pundits were predicting a good year for the markets, their theory largely going along the lines of "the markets have fallen so far in 2008, and valuations are so low, that 2009 must see a rebound".
But, amongst others things, they failed to take into account the irrationality of the markets. As individual stocks and markets plunged to new depths, the old John Maynard Keynes quote "the market can remain irrational longer than you can remain solvent" was never truer.
Companies and investors alike were learning this lesson the hard way. Individuals who were using leverage to juice their investment returns quickly found using borrowed money to buy shares cuts both ways. Some people were completely wiped out. Mixing greed with over-confidence is a dangerous wealth-destroying cocktail.
Hedge funds were forced sellers as a) banks cut off their lines of credit and b) investors rushed to redeem their money as they were panicked into seeking a safe haven for their money.
Highly indebted companies like Punch Taverns (LSE: PUB), Taylor Wimpey (LSE: TW) and Yell (LSE: YELL) also found out about the perils of over-leverage. Debt works well when it is freely available and cheap. Many CEOs, egged on by bonus-focused investment bankers, took the opportunity to make ever-ambitious acquisitions. But when the music stopped and refinancing options evaporated, investors were dealt a quick and incredibly painful lesson.
Not Much To Like About March
What is it about the month of March? I remember March 2003 very vividly. The dot com bust reached its crescendo in March 2003, with the FTSE 100 plunging to a low of 3,287. It had reached its all time peak of 6,930 on the last day of last century.
March 2009 might also go down in history as the bottom of the sub-prime/credit-crisis/global financial crisis. The FTSE 100 sunk to an intra-day low of 3,461 on 9 March 2009. It had peaked for this particular cycle at 6,754 in July 2007.
At the time, you could feel the pure manic and fear. Stock markets were in freefall, and it appeared nothing could stop them falling further. Anyone attempting to pick the market's bottom was left looking completely foolish and comprehensively wrong. I tried doing it in October last year, and although I was relatively close, I was wrong.
90% Of People Were 100% Wrong
At least I'm not alone. I love recalling how, in the midst of the major market panic in March 2009, 90% of the people who voted in this poll thought the FTSE 100 would fall to 3,200 or below.
To date, precisely 90% of the people were 100% wrong. It's an amazing statistic, and once again proves that a) following the crowd can be wealth destroying and b) many investors too easily fall into the trap of investing through the rear view mirror.
The Boom
I don't recall there being a precise catalyst during the day on 9 March that stopped the rot. Maybe some stocks just got so cheap that people felt compelled to buy them. Maybe it was the US banks, particularly Citigroup, saying they were trading profitably, even though they were still writing off huge losses from their past days of lending hubris. Maybe it was just a little bit of confidence, finally, that the end of the financial world was not nigh.
Whatever it was, by hook or by crook, the market started its recovery. By the day after April Fool's Day, the FTSE 100 was back above 4,000. So much for the 90% of people who thought it would fall below 3,200, and the 20% of people who thought it would fall below 2,500!
The post March peak for the FTSE 100 came on 7 May at 4,521. Around that time, the top 10 bounce back stocks from the FTSE 350 included Barclays (LSE: BARC), Enterprise Inns (LSE: ETI), Debenhams (LSE: DEB) and Royal Bank Of Scotland (LSE: RBS) -- all seen as complete and utter dogs in the March 2009 meltdown. Some dogs can have their day.
In the end, the FTSE 100 finished the first half of the year at 4,249, down an unremarkable 4.2% on the year, but up 23% since the March lows. It was certainly a tale of two halves.
The Future
So where to from here? Have we seen the market bottom? Might those 90% of people end up being right? Is inflation coming or are we set for a Japanese-style decade of deflation? Will the green shoots of recovery turn into giant oak trees or end up turning into brown twigs of despair?
All those answers and more tomorrow in my 'Four Predictions For The Rest Of 2009'.
More on the economy and the markets:
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> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
