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April 20, 2010

Stock Market Recovery

Filed under: News Review, Real Example, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 7:30 am

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Have you checked the US stock market lately?  Most of us stopped looking when the financial crisis hit in late 2008 and early 2009, but if you have not done so already take a peak and you will notice that it has quietly risen in the past year or so Goldman Sachs withstanding.  I wrote back in November how the stock market had gone up over 50% since its low point on March 9, 2009 and these gains have now carried on into the 1st quarter of 2010.  Tom Petruno from the Los Angeles Times wrote an article on the stock market’s 1st quarter performance in an article titled “Tenacity of stock investors pays off”.  Some of the interesting tidbits:

 Most stock mutual-fund categories scored gains in the first three months of the year; it was the fourth straight quarterly advance since the meltdown of 2008 and early 2009.

The average U.S. equity fund posted a total return of 5.1 percent in the quarter, lifting the 12-month return to 49.4 percent, said the data firm Morningstar Inc.

 “[Stock Market] beat the 2 percent average return of bond mutual funds and the near-zero average yield on money-market funds.”

“U.S. stock funds overall still are experiencing net redemptions, meaning more cash is going out as investors sell than is coming in via purchases. Instead, Americans continue to pump record sums into bond mutual funds.”

 

I went ahead and compiled a chart of how well the three major US Markets (Dow Jones, NASDAQ, S&P 500 have done in the 1st quarter of 2010.

For those of us who have continued to stay in the stock market it is nice to see a good return especially on the stocks that we bought low back last winter and spring.  Still, how is the stock market today compared to when the economic crisis really hit back in the fall of 2008?  I went ahead and pulled up some 2 year graphs showing the change from April ’08 to April ’10 for all three major indices:

Dow Jones

Chart forDow Jones Industrial Average (^DJI)

S&P 500

Chart forS&P 500 INDEX,RTH (^GSPC)

NASDAQ

Chart forNASDAQ Composite (^IXIC)

As you can see all three have rebounded nicely since the fall of 2008, while the Dow and S&P are down 15% from April 2008 and about 25% off their high in October 2007. Meanwhile the NASDAQ is about even over the last two years.  While the 15% decrease is nothing to sneeze about it pales in comparison to the 70% drop during the Great Depression.

As mentioned before it is encouraging to see stock increase in the beginning of 2010.  However, one needs to look at the big picture when investing in stocks and not just a three-month time horizon.  According to Petruno’s article many people are still weary of the stock market.

 “U.S. stock funds overall still are experiencing net redemptions, meaning more cash is going out as investors sell than is coming in via purchases. Instead, Americans continue to pump record sums into bond mutual funds.

David Kelly, strategist at JPMorgan Funds in New York, believes that investors will come to regret their caution. Given that bond yields are low while corporate earnings are rising, “The bond market still looks too expensive and the stock market still looks cheap,” he said.”

I have to agree with the bond market.  Bonds typically do well with low-interest rates and currently we are in one of the lowest interest rate environments ever.  So interest rates have only one place to go and that is up so therefore bonds will become less valuable.  Overall though it is nice to see most of our retirement accounts in 401(K) and IRA’s recover since the economic downfall.

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