It is no exaggeration to describe the past several weeks as one of the most tumultuous times in financial history. The market volatility and news events have had all investors on the edge of their seats. In our last two letters, we wrote about the intervention by our Federal Reserve; first by injecting funds and lowering interest rates, and then (behind the scenes) urging and helping major financial institutions raise capital.
Just two weeks ago, the Bear Stearns “situation” prompted an even more rigorous and historic response from the Fed. The economy is more clearly in a recession, and both consumer and investor psychology have suffered as a result of the “aftershocks” we cited in January. History is of some comfort in generating optimism from these events. The Penn Central bankruptcy in 1970, and the Continental Illinois bankruptcy in 1984, signaled the trough of a market decline, as pessimism reached its highest point and extraordinary values were created in stocks.
During the quarter, and so far in the month of April, small stocks have performed better than large stocks, and value stocks have done better than growth stocks, thus we have outperformed the market. We would note that after the panic-selling of the fourth quarter and the first two weeks of January, investors have begun to sort out value from fluff, and stock selection is once again paying off. We have been adding to stock positions, anticipating higher valuations over the course of the rest of the year.