Our Investment Reponse to the Recent Credit Market Disruption
One of the themes in sustainable, responsible investing is “patient capital.” Patience and a long-term perspective are especially valuable at times like these. And, while stocks can always fall more, we believe there is a good chance that markets will find a surer footing in the months ahead.
A quick summary of what has occurred: after spending two years pushing up interest rates, the Federal Reserve was able to slow the economy, and investors hoped for a soft landing that would avoid an economic recession. However, as is often the case, rising interest rates uncovered weaknesses in the financial system, including an overheated housing market and the unsound lending practices that trapped many in long-term loans they could not afford, once the initial enticement rate was adjusted.
As the economy and the housing market began to falter, the Fed reversed policy last summer and began cutting rates. But bonds backed by mortgages, particularly riskier “subprime” mortgages, began to fall precipitously, leading to a crisis of confidence that built during the fall as a pernicious market undercurrent. During the weekend of March 15-16, we witnessed the fire sale of Bear Stearns, which was very leveraged and particularly exposed to the mortgage market and derivatives.
As an investor it is critical not to over-react to the news, no matter how dire, because markets look ahead 6-12 months and have already incorporated today’s headlines. Paradoxically, the best time to invest can be when the news is at its absolute worst. It is increasingly likely that we are in the midst of what will be an official recession, which if it is a bad one could last a year or more. However, stocks tend to find a bottom during the recession, and move upward well before the economy does. So it pays to be patient and invest for the long term.
Our approach to investing emphasizes the fundamentals: diversification, quality, and a long-term investment horizon. We do not invest in the types of exotic securities that are making headlines, avoiding junk bonds and complicated financial instruments. Thus our clients’ investments are not anywhere near the epicenter of the current crisis, and any peripheral exposure has been limited by our commitment to diversifying assets. If there are further market declines, the impact will be dampened by this diversified, prudent approach.
We encourage those of you who have further questions about Trillium Asset Management Corporation’s approach to protecting clients’ assets to visit the About Us section of our web site