Stock Performance

Since the March 9 low in the stock market, the market has risen almost 50%. If you had invested $1,000 at the beginning of 2008 and that fell to $500 by March 9, between then and now you would have gained about $250 (50%) and be back to $750. That is still 25% below where you started, but it’s a lot better than where you were on March 9. This stock market is up 49% in five (5) months. To say that this is unprecedented is to put it mildly. You have to go back to the early 1930s market rally to find when it last happened. Of course, that rally was followed by a decline through 1932 that led to prices being down about 82%. I don’t want to burst anyone’s bubble but it appears to me the stock market is ahead of itself. Consumers account for about 67% of the spending in the economy. Currently, many consumers are out of work. It is unlikely that they will increase their spending. An article in today’s Wall Street Journal, “Debt Burden to Weigh on Stocks,” indicated that: “. . . household indebtedness peaked in 2007 at 132% of disposable income. That was the highest level since the end of WWII and quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting the ratio had fallen to 124%, a tad lower but still miles from the level of, say 69% in the middle of 1985.(WSJ,pg. C1,08-10-2009)” Consumers are not borrowing but are paying down debt and saving. If that is the case, how is the economy going to grow? How are corporations going to see profits increase? When will companies begin to create new jobs? I have to agree that we are better off now, than, say, last November when things looked bleak. But are we so much better off that the stock market should be up 49%? In a news story today on Bloomberg.com, the reporter indicated that Mark Mobius at Templeton is expecting a 20-30% correction in the market. They also report that Warren Buffett is shifting out of equities and into U.S. corporate bonds and foreign government bonds. These are two very astute investors who manage a lot of money. If the market declines 20 - 30%, it will not be down as much as it was on March 9, but it still would bring us close to that point. If we take the $750 that we now have from our original $1,000, a downturn of say 25% would leave us with $563. Of course, the future will tell all, but for now I would not get carried away buying equities. Ed Mallon