Dodge & Cox: Market Commentary and Outlook

The U.S. capital markets continue to experience a period of extraordinary turmoil, marked by liquidity and credit concerns in the financial sector and a series of government interventions. This has been a difficult period for our clients and investors in the Dodge & Cox Funds. As fellow Fund shareholders, Dodge & Cox employees share in the recent disappointing results. We believe that the fear and uncertainty currently gripping the financial markets mask the long-term prospects for global growth, and we see opportunities to benefit from this disconnect.

Market turmoil is nothing new for Dodge & Cox, as we have managed investments since 1930. In the last two significant banking downturns (early 1980s and 1990-91) banks experienced difficulties due to asset quality and funding concerns, and their stock prices fell to low levels. During those periods, many banks failed and the industry
consolidated. However, banks with strong, long-term business franchises survived and ultimately flourished during the subsequent recovery. It was not a case of the regulators bailing out systemically important banks during those prior downturns, but rather providing banks with the breathing room and flexibility needed to overcome temporary challenges.

The current credit cycle, beginning in the summer of 2007 but worsening recently, has proven to be similar in some ways but different in others. The lack of confidence in the financial system worldwide has severely constrained credit and capital flows, resulting in a series of bank failures in the U.S. and Europe. Mark-to-market accounting (which did not exist to the same extent in the 1980s and 1990s) has required banks to value distressed assets at the prices established by desperate sellers. This, in turn, has led to an unprecedented need by many financial institutions to raise capital in a short period of time, and has exacerbated the crisis of confidence in the financial system.

Read the full article