1. • Financial Planning
   • Tax Strategies
   • Investment Management
   • Insurance Services
   • Estate Planning
   • Distribution Planning
2. • Our Approach
   • Our Team
   • FAQs
   • Career Opportunities
3. • Articles
   • eNewsletter
   • Market News
   • Special Events
4. • Stations
   • Meet the Host
   • Meet Frequent Guests

March 8, 2010 - Happy Anniversary?

One year ago, on March 9, 2009, the stock market began a rally that has led to a total return of 72% for the S&P 500, through the end of last week. As we reach this anniversary it is worth taking a look back at the powerful rally that has unfolded and seek clues as to what may lie ahead as the rally reaches a mature stage.

The stock market rebound has been broad and ranged across all sectors, sizes, and regions of the globe. Even the troubled stock market in Greece is up about 56% in U.S. dollar terms, and 46% in Euros, over the past year, as measured by The Athens Stock Exchanged General Index. Other markets have posted gains, as well. Over that same period, commodities are up 33%, measured by the Commodity Research Bureau (CRB) Commodity Price Index. The bond market, measured by the Barclays Aggregate Bond Index, is up about 9%. In the bond market, losses in intermediate and long maturity government bonds were in contrast to the stock market-like gains delivered by lower-quality corporate bonds over the past year.

While the powerful 72% total return including dividends (68% price only rise in the index) lasting a full year was very strong in historical terms, it pales in comparison to the devastating decline that took the S&P 500 from 1565 on October 9, 2007 to a low of 677 a year and a half later. The S&P 500, now at 1139, has only recovered about half of the losses.

The combination of improving credit markets, the return of economic and profit growth, and demand from overseas investors has sustained the rally over the past year.

The global tailwinds for growth created by massive government stimulus may begin to fade or even give rise to headwinds in the second half of the year (we presented our outlook for this transition most recently in the February 16, 2010 Weekly Market Commentary entitled The Winds of Change). Our outlook leads us to believe that the slower pace of growth may now begin to slow the rally and contribute to the return of volatility in the stock market.

In fact, this is precisely what history tells us is likely to happen. Over the past 40 years, recession-related bear markets ended with strong stock market rallies that lasted until their first anniversary. In their second year, the rallies flattened out and became more volatile providing modest gains punctuated by multiple 5-10% pullbacks.

Over the past 40 years, there have been four recession-related stock market declines in excess of 20%. The rallies that followed these bear markets began following the close on:

1. March 26, 1970, after a 36% decline
2. October 3, 1974, after a 48% decline
3. August 12, 1982, after a 27% decline
4. March 11, 2003, after a 49% decline

It is helpful to review these in reverse chronological order and compare them to the performance of the S&P 500 following the end of the latest recession related bear market.

After one year, the S&P 500 is up about 70%. Happy Anniversary? Not entirely. Of course, it is good to have recouped half of the bear market losses. However, the next year is unlikely to be anywhere near as rewarding as the past one if our outlook for a transition from tailwinds to headwinds unfolds and if history repeats itself as the one-year anniversary of the current rally passes.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

Small-cap stocks may be subject to higher degree of risk than more established companies’ securities. The illiquidity of the small-cap market may adversely affect the value of these investments.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price.

© LPL Financial

Refer Article to a Friend >

--------------------------------------------------------------------------------------------------

Back to archives