Date: January 20, 2015

7 Years Ago

As I drove home from Vermont today on Martin Luther King Day, I thought about past MLK Days, which is something I would normally do to pass the time away. My two boys were in the back seat napping and listening to music and I had Sirius on in the background. I vividly recall MLK Day 1994 as it was the single coldest day I have ever skied at Mount Snow, -25F with 20 mph winds that made it feel like -50F. I lasted all of two runs with an intervening break in the lodge on top. It was also the earliest I ever hit the bar and stayed there all day.

Market-wise, MLK 2008 is indelibly inked in my memory. Coming off a huge 2007 for our strategies in a difficult market environment, we began 2008 with a positive view of the stock market. At year-end, the market was finishing up its 2nd 10% decline in 5 months and I thought we would be a solid bounce to sell into in January. That didn’t happen.

Instead, stocks saw an orderly decline that appeared to end on the 9th. After a few days of pause, the selling floodgates started to open on Thursday and Friday before MLK Day. Over the weekend, the first major piece of financial crisis news hit. Previously, we had seen bits and pieces like sub prime loads beginning to default and two Bear Stearns hedge funds blowing up. But each time, the market digested the news and headed higher. MLK weekend 2008 it all changed.

When Japan opened Sunday night, I knew it was going to be bad. In fact, markets all over Asia were bleeding red to the tune of 5-8%. Our futures immediately signaled at least a 500 point decline when trading resumed on Tuesday from a Dow at 12,000. When I woke up Monday morning and saw Europe in collapse and our futures “limit down” which is the maximum point decline allowed pre-market, I knew our clients would be very concerned, especially if they didn’t hear from me with some kind of reassuring explanation. So I spent my MLK Day 2008 on the phone calling each and every client letting them know that I expected to see a 500-1,000 point decline in the Dow on Tuesday morning. I also explained that while there would be some short-term pain, I believed it was absolutely the worst time to sell. In fact, if anything, it looked like the final “flush” in the decline that began late on 2007 and a bottom should be at hand shortly. Investing is a marathon not a sprint and not only did I remind clients of that, I reminded myself as well!

Thankfully, every single client but one listened to my advice and some even bit the bullet and added money to their accounts early in the week. Stocks closed that post MLK Day Tuesday well off their lows and all seemed like it would be okay from there. Then Apple had a really bad earnings miss that afternoon and once again, overnight trading indicated another disastrous open. But a funny thing happened on the way to a crash as was being predicted. After another ugly open, buyers came storming in throughout the day and the Dow actually closed sharply higher, regaining all of the lost ground from Tuesday and the previous Friday.

Tuesday’s and Wednesday’s action post MLK was stage one in the stock market’s first quarter bottom that led to the May peak above 13,000 and the last good opportunity to sell before the crisis really unfolded.

January 2008 was the worst month I delivered to clients since launching my firm and the most difficult of my career at that point. There were a lot of “strange” messages being sent from our market models that didn’t make a whole lot of sense to me then. I just kept scratching my head wondering if our models were broken. In hindsight, they were dead on in warning of major systemic issues down the road that I had never seen before. After doing countless hours of research in spring 2008, the only comparison I could find was the period from 1929 to 1932 where the Dow lost 89% of its value. I am certainly glad I continued listening to our models in 2008!

While 2008 ended up being the year no one ever wants to repeat, MLK Day 2008 will always stick out in my mind as the day I chose fight over flight by calling all of our clients proactively. It was also a time where I knew I could handle whatever the market threw at me, good, bad or otherwise.

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Paul Schatz, President, Heritage Capital