Lessons from the Crash

Wall St.It?s not the kind of anniversary most of us will celebrate with bubbly. In fact, plenty of investors have spent the better part of a year trying to forget the series of events last fall that nearly brought the financial system to its knees and wrecked portfolios everywhere. Strategists, while cautious given the staggering deficit and billions in government spending, are more optimistic.

For instance, Bob Doll, global chief investment officer of equities at the $1.3 trillion asset manager BlackRock, expects a choppy market with slow but steady improvements. “I think we?re in for a soggier-than-usual recovery,” he says. Clearly, the level of optimism varies among economists and investment managers, but regardless of their take, the pros are asking the same question: What have we learned, and what should we do differently?


One of the biggest legacies of the credit crisis is that credit will be much harder to come by, for companies and individuals. That?s why investors should focus on a firm?s balance sheet, says Strategas chief strategist Jason Trennert. Firms with plenty of cash, little debt and solid market share will be better positioned for a rocky recovery. And fund managers say many of these high-quality firms ? the likes of Coca-Cola and Microsoft ? are still relatively cheap.


The United States generated the global recession and exported it to the developed world. But experts expect countries like China and India to generate high single-digit growth next year, despite the global downturn. The emerging markets aren?t immune to what?s happening in the rest of the world, but their growth is real. One way to tap that opportunity is through local firms catering to domestic demand, a strategy that has Richard Gao, manager of Matthews China (MCHFX), beating most of his peers. The T. Rowe Price Emerging Markets Stock fund (PRMSX) takes a more global approach, focusing on bargain firms with big growth ahead.


There?s an old joke: Put two economists in a room and you?ll get three opinions. That?s never been more true than on the topic of inflation today. Some economists are worried that the deluge of money the federal government has pumped into the economy will soon usher in 1970s-style inflation that is completely unfamiliar to a generation of investors. Others say the unemployment rate, now at a 26-year high, and weak consumer demand will keep a lid on prices for some time.

Sentiment is likely to zigzag from one extreme to another for the foreseeable future? says Rex Macey, chief investment officer of Wilmington Trust, which manages $35 billion. Whatever happens, the crisis underscored the importance of guarding against all sorts of unlikely events. That?s why Macey recommends putting slivers of your portfolio beyond the usual stocks and bonds. Investors should consider buying commodities, he says, like the gold ETF, when prices, currently on the high side, pull back a bit.

Careful stock selection can achieve the same result, says T. Rowe Price New America Growth fund manager Joe Milano. He likes firms that should be able to raise prices, like agriculture-related firms Monsanto or Potash. Milano expects them to benefit from an expanding global population and rising incomes in the developing world.


The differences among Treasury, municipal, corporate and high-yield bonds have rarely been as stark as they have been lately. That?s good news for investors willing to take on a little risk but bad news for investors who are accustomed to stashing some money in Treasurysand then forgetting about it. Because so many investors sought safety in Treasury bonds in the wake of the crash, prices have run up to the point of being riskier than some investors realize, says Jeremy Zirin, senior equity strategist for UBS Wealth Management Research. When bond prices rise, yields fall, and inflation would only eat away at that income. Plus, Treasury prices could fall sharply if interest rates start moving up.

Instead, fund managers have pounced on bargains in the corporate-bond market to grab stock-like returns with less risk. Of course, some bonds could be land mines, which is why planners suggest turning to the pros, like the Harbor Bond (HABDX) or Fidelity High Income (SPHIX) funds.


The crisis has shifted power and influence from Wall Street to Washington, and the administration?s efforts aren?t limited to the financial industry. That was a shock to investors who piled into health care stocks last fall because of their traditional resiliency in downturns. They reasoned that failing banks and a teetering economy would take precedence over health care reform, minimizing the risk for the group.

But health care played a central role in President Obama?s budget proposal released this spring, surprising investors who then dumped the stocks. But AIM Global Health Care fund manager Derek Taner has been bargain-hunting. Reform won?t affect every health care company in the same way, he says, and there are many examples of firms it could help, like generics giant Teva. He also picked up battered managed-care firm WellPoint. “If anything happens in terms of reform, it won?t be implemented until 2013 or 2014,” he predicts. “Until then, there is a viable business.”

2009 Copyright The New York Times Syndicate