Surgery News - May 2008 - (Page 19)

M AY 2 0 0 8 • SURGERY NEWS FINANCE COVERING YOUR ASSETS 19 Have They Rung the Bell Yet? T he stock market decline and the turmoil in the credit markets seen over the past 6 months have gotten financial experts talking about “recession/bear market” and “market bottom/recovery.” In order to navigate these turbulent times, it helps to understand the historic interplay between the stock market and the business and earnings cycles. A bear market has been defined as a decline of 15%-20% in the major stock indices, and a recession as two quarters of negative growth in the gross domestic product (GDP) (http://en.wikipedia.org/ wiki/Recession). Historically, the temptation to liquidate investments is greatest at the bottom of a bear market, but this is also one of the best times in order to buy equities. Unfortunately, as the Wall Street saying goes, “no one rings a bell” when that bottom of a bear market occurs. But history can help us “listen BY CHARLES D. MABRY, for the bell.” M.D., FACS Stock markets generally are driven by corporate earnings, which depend on the health of the economy. Since 1950, there has been a fairly consistent compound growth of nominal GDP, corporate earnings per share, and the Standard & Poor’s 500 Index (www.investopedia.com/terms/n/ nominalgdp.asp; www.investopedia.com/ terms/e/earnings.asp). Over time, despite several recessions and even more bear markets, investments have grown at an annual rate of 8%. Typically, earnings momentum slows with a peak well before the economy dips into a recession, but profits continue to lag behind the initial economic upturn. Recessions since 1950 have seen real earnings per share fall an average of approximately 30% over 30 months (www.gpoaccess.gov/indicators/browse. html). And since corporate earnings, not the GDP, drive the stock market, their decline causes a bear market. Since 1950, recessions have lasted an average of 10 months, economic cycles (expansion to recession to another expansion) roughly 6 years (www.nber.org/cycles.html), and the average bear market about 13 months, with a range of 3-30 months. The shorter bear markets occurred in the absence of a recession, while recession-related bear markets lasted longer. Bear markets have had an average peak-totrough decline of 28%. A drop in equities typically precedes a recession by roughly 6 months, and forecasts a drop in corporate earnings; the average bear market bottoms out roughly halfway through the recession. But stocks fall most sharply midway through a recession, when investors finally “capitulate” and optimism fades. Earnings typically undergo an average of peak-to-trough decline in earnings per share of roughly 25%-30%. The stock market declines 10% at the beginning of a recession, and another 15%-20% during the capitulation phase, for an average bear market loss of roughly 30%. Then stocks typically begin to rally from oversold and depressed valuations at the bottom of the bear market to recommence the stock cycle. Equity markets tend to have a rally phase of 25% from the bottom of the recession. The current stock market cycle seems to have peaked between July and October 2007, which would put the start of a U.S. recession in the first quarter of 2008. Assuming this recession lasts for 10 months, we would anticipate a bottom in the economy sometime in the fourth quarter of 2008 and in the equity market sometime in the summer of 2008. No one knows how closely the markets will follow history, but wise investors will anticipate a scary sell-off. Rather than panic and sell, this is the time to cautiously invest as we hear the bell faintly ringing. DR. MABRY serves on the finance committee and investment subcommittee of the ACS Board of Regents and is the series editor for the ACS Practice Management Course for Residents and Young Surgeons. 1.08% works a number that WE CUT OUR EXPENSE RATIO Recognizing the goal of offering members of the American College of Surgeons and afﬁliated organizations a reasonably priced investment product, the expense ratio of the College’s Surgeons Diversiﬁed Investment Fund (SDIF) has been lowered to just over 1%. The lower expense ratio will have an immediate positive impact on our shareholders, and, over time, will positively impact the performance returns for prospective and current shareholders. The new expense ratio, including ETF costs, is 1.08%. Moving forward, all current and prospective investors will have the ability to invest at a lower cost in a no-load, open-end, diversiﬁed, actively managed mutual fund. SDIF is broadly modeled after the ACS’s endowment utilizing the same investing principles of asset allocation, diversiﬁcation and rebalancing. For more information about SDIF, please contact Tom Kiley at 312/202-5019, tkiley@facs.org, or Savi Pai at 312/202-5056, spai@facs.org. An investor should consider the charges, risks, expenses and investment objective carefully before investing. For more information or for a free copy of the prospectus, please download a copy at www.surgeonsfund.com or call 1-800-208-6070 and a copy will be mailed to you. Read the prospectus carefully before you invest or send money. SDIF is distributed by Ultimus Fund Distributors, LLC, 225 Pictoria Dr., Suite 450, Cincinnati, OH 45246. The phone number is 513-587-3400. http://en.wikipedia.org/wiki/Recession http://en.wikipedia.org/wiki/Recession http://www.investopedia.com/terms/n/nominalgdp.asp http://www.investopedia.com/terms/e/earnings.asp http://www.investopedia.com/terms/n/nominalgdp.asp http://www.investopedia.com/terms/e/earnings.asp http://www.gpoaccess.gov/indicators/browse.html http://www.gpoaccess.gov/indicators/browse.html http://www.surgeonsfund.com http://www.nber.org/cycles.html http://www.surgeonsfund.com

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Surgery News - May 2008 Contents New Lung Approach Speeds Extubation Innovative GI Procedures May Improve Diabetes Quality Programs Differ on Risk Data Crystal Ball Medical Modeling Ventricular Valve Taking Stock

Surgery News - May 2008

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