• The S&P 500 falls more than 10 % in the first 14 trading sessions of 2008
• The National Association of Realtors reports that 2007 saw the largest drop in existing home sales in 25 years
• Bear Stearns receives funding from the Fed on March 14th as it's stock price is cut in half in a matter of days
• Bear Stearns is acquired by JPMorgan Chase for $2 per share on March 16th, the next day shares trade for less than $3 (from > $80 in January)

The system outperformed fairly solidly during this period. The primary universe (S&P 500 minus Financials and Utilities) slightly underperformed it's more complete counterpart.

• UBS announces it will cut 5,500 jobs by mid-2009
• Ex-Bear Stearns managers arrested by the FBI for misrepresenting the health of their funds
• IndyMac goes into receivership

The system's performance here is quite solid again, slightly weaker than period 1. The primary universe blew away its cousin this time, obviously becasue of the serious decline in some of the financials.

• Federal Takeover of Fannie Mae and Freddie Mac
• Merrill Lynch sold to Bank of America
• Lehman Brothers goes bankrupt
• The Fed produces an $85B loan to save AIG from Bankruptcy
• Washington Mutual seized by FDIC
• The $700B Fed Bailout package is first defeated in the Senate, but modified and passed on October 1st
• Following the bailout, the S&P500 sees its worst week in 75 years, falling 18.2%
• Global stock markets follow the US with steep losses

The system's performance during what was essentially a market crash was particularly poor, virtually erasing all of the earlier outperformance. Interestingly, the worst performing decile group (rating) was stocks rated 9.

Plainly looking at the numbers, one could say the results are basically random and the ratings not correlated with outperformance. Personally i think it's too early to really make any judgement with such limited data and range of market conditions (conditions limited to falling and crashing!). The optimist could surmise that during periods 1 and 2, there were more 'normal' market conditions which are more likely to occur in future than the extreme conditions of period 3. An optimist may even go further and speculate that good stocks were sold off during period 3 as certain leveraged market players were forced to meet margin calls and raise capital, maybe these stocks were the last equity holdings of some, or the last that still had a bid. If it weren't for the severity of the financial crisis, this forced selling may not have occured and the outperformance of the ratings system could haev continued...

That might be what an optimist would say...

For now, only time will tell. Shortly i'll be posting a 'part 2' of this post which will look more in depth at the performance of the system's factors and subfactors. This also means finding out which fundamental attributes held up and which sunk, i already have the numbers and take my word for it, it's quite interesting...

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