What’s Happening To The Stock Market?
What’s Happening To The Stock Market?
By Robert Laura, AAMS, CMFC, CRPC
Like many of you I received my 401(k) statement this weekend and much to my chagrin, I wasn’t moving closer to retirement. So I spent some time doing some research on the market conditions we are currently experiencing.
As many of you know we recently entered a “Bear Market.” This is commonly defined as a 20% drop from a market high. Back in October 9, 2007 the Dow Jones Industrial Average peaked at 14,167. Then on June 27th, 2008 it dipped below the 20% mark.
The good news is that once the decline reaches the arbitrary 20% mark, based on history, the market has suffered most of its losses. In fact, by the time the market was down the requisite 20%, the average bear market was 74% complete(1). While this may mean there’s some additional issues to deal with, statistically speaking the worst may be over.
In my opinion the real danger of a bear market is the impact it can have on individual investors. Bear markets can last anywhere from 3 months, as evidenced by the 1987 downturn, or as painfully long as the 21 month bear of 1973. This can wear on the psyche of investors who decide to exit the market at the worst possible time, the bottom.
Fortunately, bear markets are only half of the cycle, and represent the much smaller half of it. Since 1950, the nine bull market advances following a bear market lasted four times longer with an average gain of 165.7% (2). Additionally, ever since Harry Truman trumped Thomas Dewey in the 1948, the Standard & Poor’s 500-stock index has averaged a 9.69% gain during Presidential election years, which gives me a reason to see the investment glass as half full (3).
The reality is, every bear market is different. They are a common part of the investment process as evidenced by the approximately 11 bear markets from 1940 (4). Furthermore, even superstar investors like Warren Buffet whose Berkshire Hathaway shares are off 21% from its peak, aren’t immune to a market downturn.
It’s common for investors to be concerned during economic downtimes, but it’s more important that they be aware of the factors affecting their portfolio. Find a financial professional to educate you on events driving the market right now, such as how bond funds typically perform in an environment of increasing interest rates; what sectors of the economy may be best suited for withstanding a long-term bear market; and which companies are likely to be on the front end of a recovery. The biggest risk you face, in both a good and bad stock market cycles, is remaining uneducated.
|
Bear Market Beginning |
Bear Market Ending |
% Change |
| May 1946 | May 1947 | -28.47% |
| June 1948 | June 1949 | -20.57% |
| August 1956 | October 1957 | -21.63% |
| December 1961 | June 1962 | -27.97% |
| February 1966 | October 1966 | -22.18% |
| November 1968 | May 1970 | -36.06% |
| January 1973 | October 1974 | -48.20% |
| November 1980 | August 1982 | -27.11% |
| August 1987 | December 1987 | -33.51% |
| March 2000 | September 2001 | -36.77% |
| January 2002 | July 2002 | -31.90% |
(1) Barrons, The Bears Back, by Randall Forsyth and Vito Racanelli, July 7th, 2008, p.17
(2)Fool.com, The Next Bear, By Doug Short
(3)businessweek.com, Playing politics with your portfolio, by Chris Farrell, June 7th, 2008.
(4) Bespoke Investment Group, via Barrons as referenced above
(5)Table Source: Bespoke Investment Group, via Barrons as referenced above
Robert Laura is the senior bank executive, professional financial speaker, the author of Financial Karma and The Five Most Important Things They Don’t Teach You In School, and maintains the FinancialFYI.com website for interesting financial news, statistics, and research. He can be contacted at rl@robertlaura.com
Financial Deja Vu, Medical Credit Cards, Another Bank Failure, Top Leased Car, 2012 Olympic Budget, Presidential Fundraising, Wall Street Analysts Off 40%, College Education Up 439%, U.S. Home Prices Fall Again, Uninsured Americans
Financial Deja Vu
During the savings-and-loan crisis of 1990 and the Long-Term Capital Management crisis of 1998, financial stocks dropped 50% and 32%, respectively, from their highs. Over the next two years, these stocks rose 50% from the bottom. Source: Fool.com. Full Story.
Medical Credit Cards
Are you ready for a medical credit cards? Unlike regular consumer credit cards medical credit cards can only be used for health-care expenses. Companies like GE Money and Citigroup are using these cards to help both consumers deal with soaring out-of-pocket medical costs and a resource-strapped medical community to get paid. Already, doctors and hospitals endure $60 billion annually in unpaid medical bills, according to management consulting firm McKinsey. And that figure is expected to climb. In 2005, consumers spent $250 billion in out-of-pocket medical expenses, according to McKinsey. By 2015 it’s estimated to grow to $420 billion. There are some danger though: By using one of these credit cards, patients convert their medical debt, which doesn’t typically show up on a credit report unless it goes to collection, into revolving consumer debt. That moves the debt onto the patient’s credit report – which could have broader repercussions should bills be late. Also, once a bill is paid for with a credit card, the account with the medical provider is closed. That means patients can no longer negotiate or question the cost of their care with their doctor or hospital, warns Nora Johnson, a vice president with the nonprofit agency Medical Billing Advocates of America. Source: SmartMoney.com. Full Story.
Another Bank Failure
Aug. 22, Kansas bank Columbian Bank and Trust Co. became the ninth U.S. financial institution to fail during the current credit market difficulties. Source: Businessweek.com. Full Story.
BMW: Top Leased Car
Four out of the top 10 most commonly leased vehicles in the U.S. auto industry are BMWs, according to J.D. Power & Associates’. According to PIN data, the flagship BMW 7 Series sedan is No. 1 on the list of most leased vehicles, at 85.3% lease penetration. That is, 85.3% of the 7 Series customers from Jan. 1 through Aug. 10 leased their cars. The rest took out a loan or paid cash. That’s an extraordinarily high percentage of leasing, compared to industry standards. For the whole U.S. industry, leasing accounted for only about 19.7% of retail volume in July vs. 53.8% loans and 26.5% cash. Source: Businessweek.com. Full Story.
2012 Olympic Budget
The British have a budget of just over $17 billion to deliver the 2012 Olympic Games in London, compared with the $44 billion that Chinese authorities spent on the Beijing Games. An estimated $1.3 billion of London’s $17 billion budget will be spent on upgrading the city’s 100-year-old underground and rail system. A further $407 million is earmarked for Olympic policing, a 15% budget increase since the city won the right to host the Games back in 2005. Source: Businessweek.com. Full Story.
College Education Up 439%
After adjusting for financial aid, the amount families pay for college has skyrocketed 439% since 1982. Source: Money.cnn.com. Full Story.
Presidential Fundraising
Obama raised more than $105 million in the first six months of the year, compared with Senator John McCain’s $76 million, according to the Center for Responsive Politics. In July, Obama’s fund-raising nearly doubled that of his rival, generating $51 million. In campaign filings with the Federal Election Commission, candidates need not report whether the money comes from online donations, mailed-in checks, or personally delivered cash. But Obama’s campaign said earlier this year that as much as 88% of donations stemmed from online sources. Source: Businessweek.com. Full Story.
US Home Prices Fall… Again
National U.S. home prices fell a record 15.4% in the second quarter compared with last year, according to a report out Tuesday. The latest S&P/Case-Shiller national home price index showed no signs that the pace of home-price declines is easing. The loss was even larger than the record 14.2% drop posted in the first three months of 2008. Source: Money.cnn.com. Full Story.
Uninsured Americans
Americans without health insurance will spend $30 billion out of pocket on medical care this year, according to a new report by George Mason University and the Urban Institute. The government will pay about 75% of an additional $56 billion in health costs – or $42 billion – for the uninsured. The rest is covered by private physicians, community groups and hospitals. Source: Money.cnn.com. Full Story.
Analyst Recommendations Off 40%
A recent report by Patrick Cusatis and J. Randall Woolridge of Pennsylvania State University found that Wall Street analysts consistently overestimated the future earnings growth rates of the companies they covered. By a lot. I mean, by a whole lot. The researchers compared average forecasted annual EPS growth against the actual results over the time horizon of the forecast and found, over both short runs and long runs, analysts are overestimating the earnings growth of the companies they so closely track by a mind-blowing margin. On the five-year horizon, actual EPS growth clocked in almost 40% below analysts’ estimates. Source: Fool.com. Full Story.
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Financial FYI: Olympic Athletes Make Money, The Growing Problem of Alzheimer’s, Record Price of Gasoline, One Million Expected To Lose Home, Disaster Travel, Global Cost of The Credit Crisis
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Yes, Olympic Athletes Make Money
Neither the International nor the U.S. Olympic Committees pay the athletes for competing, but the USOC pays athletes a good sum for winning medals.
$25,000 for a Gold, $15,000 for a Silver, and $10,000 for a Bronze. But the real money that athletes make comes from lucrative marketing deals. U.S. swimmer Michael Phelps, for instance, receives an estimated $5 million for plugging companies like Omega, PowerBar, Visa and Speedo. Phelps will also get a $1 million bonus from Speedo if he can match the record seven golds in a single Olympic Games set by U.S. swimmer Mark Spitz in the 1972 Summer Games in Munich, Germany. Source: money.cnn.com. Full Story
The Growing Problem of Alzheimer’s
26 million people worldwide have Alzheimer’s, and 106 million could be afflicted by 2050. Source: Businessweek.com. Full Story
Sponsored by AdultDaycareServices.org State by State Guide For Adult Daycare
Record Price of Gasoline
The average retail price for a gallon of gasoline reached it’s record high of $4.114 on July 17, 2008. Source: Businessweek.com. Full Story
One Million Expected To Lose Home
The U.S. Department of Housing and Urban Development is expected in late September to come up with a formula for how to distribute $3.92 billion to states and cities nationwide to turn foreclosed property to affordable housing for sale or rent. It is estimated that one million families are expected to lose their homes this year. Source: money.cnn.com. Full Story
Disaster Travel
For as little as $135, you can spend a day touring the site of the world’s worst nuclear accident. The excursion includes visits to a radioactive ghost town and the dilapidated sarcophagus covering Chernobyl’s nuclear reactor core, still burning 22 years after it exploded. Visiting the site of a catastrophe may not be everyone’s idea of a vacation. But disaster tourism is on the upswing, from Ukraine’s Chernobyl to Hurricane Katrina wreckage in New Orleans. The fall of former totalitarian regimes has opened up some disaster zones previously off-limits to visitors. That, along with growing concern about the global environment-and plain old curiosity-are fueling a booming business for tour operators. Source: Businessweek.com. Full Story
Global Cost of The Credit Crisis
The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. Other hedge fund managers including Bridgewater Associates estimates it may hit $1.6 trillion or even $2 trillion according to Nouriel Roubini, the highly-respected professor of economics at NYU’s Stern School of Business. Source: cnn.money.com. Full Story
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