Financial Market UpdateStrategicPoint of View®
June 14, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Consumers took on more new debt than anticipated in April. Jobless claims continued to disappoint. A surprising decline in retail spending (down 1.2% after rising for eight months) was offset by a positive increase in the Consumer Sentiment Index (driven by a decline in oil prices). Consumer spending remains at least two thirds of GDP. If a resumption of spending does not occur in June, the data may not be as easily overlooked.
S&P 500: 1,092 (up 2.54% for the week and down 2.06% on the year)
Dow: 10,211 (up 2.82% for the week and down 2.08% on the year)
NASDAQ: 2244 (up 1.13% for the week and down 1.10% on the year)
10-year: 3.23% (from 3.21% last week)
Crude Oil (July): $74.21 (from $71.51 last week)
Gold (June): $1,229 (from $1,216 last week)
USD/Euro: $1.2100 (from $1.1973 last week)
THIS WEEK
The housing market is back on the agenda, with reports on home builders’ outlook and on housing starts. Inflation data is expected to remain muted. Industrial production should tick up. Perhaps the most interesting report should be leading economic indicators. These are expected to rise, forecasting a more positive economic outlook.
COMMENTARY
Let’s skip the headline risk statistics this week. They have become all too predictable and way too distracting. Instead let’s focus on market corrections from recent history. Not that the past is any indication of the future – we have all had fair warning about the inaccuracy of that assumption - but history does offer perspective and a chance to step back from the noise and frenzy of today’s markets.
First a quick review of the last complete bear market cycle: 1966-1982. Recall that – from start to finish – large cap stocks went practically no where for the entire period. You would think that would mean a dull, boring time in stock market history. Far from it.
Between 1966 and 1982, there were 7 major rallies (over 20% each) and 8 major corrections (of 10% or greater). On average the rallies, which stretched from 21% to 75%, added 35% to equities. The corrections, which ranged from 12% to 45%, erased 25% of equity value. Booms lasted, on average, 11 months; busts typically took 6-18% months.
Taking a longer view, since 1927 stocks have corrected (declined more than 10%) 58 times.
57% of the time these corrections never entered bear market territory, stopping somewhere between 10% and 20%. 43% of the time, however, the corrections evolved into true bear markets, losing on average 35%.
So where does all this information lead us? Is it inevitable that we are headed for a bear market by the end of the summer? Hardly. However, history does remind us that we should be looking at patterns over months, not days or weeks. Our current correction is barely six weeks old. It is way too soon to declare the end of the market’s decline. It is also premature to announce the arrival of a bear market.
The key will be how investors view each dip and subsequent rally. In 2009, declines were modest and presented buying opportunities. If the rally is to resume, investors will need to view current valuations as attractive and add to their holdings, taking a longer view and ignoring immediate headlines. If a bear market ensues in 2010, rallies will likely be seen as a time to take profits off the table, allowing the markets to drift lower until such time as enough uncertainty has been wrung out of the laundry list of global problems.
* * *
Barron’s published its semi annual roundtable of market experts this past Saturday. Overall, the tone seemed subdued. In terms of the short term outlook, more of the experts were downbeat than in January. Each expert had a short “Buy List” which matched their varied forecasts. If there was an investing theme, it was that the gold rally is not over, although a correction is quite possible. The article, appropriately titled, “Handle with Care,” tempers optimism with caution and encourages patience, a viewpoint we espouse as well.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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