Retirement Guys: Will it be a trick or treat on Wall Street this month?Written by Nolan Baker Mark Clair | | email@example.com
In our June 24 Toledo Free Press column, we asked the question, “Will history repeat itself?” The purpose of that question was to make sure our readers looked at having an exit strategy in place for the next stock the stock market sell-off. Little did we know at that time the sell-off would start in only a few short weeks. The other goal of that column was to stress the importance of running the fire safety drill while everything was going good, so an investor could avoid a panic situation. For investors without a clear and well understood plan, the sell-off recently in the stock market could be very concerning. That leads us up to today, as I now ask the same question, will history repeat itself?
First, let us go over the good facts. For our research, we will use the S&P 500 as our point of reference. This is an unmanaged index of 500 stocks and we feel it is a pretty good reflection of the U.S. stock market. “In the last 20 years (1991-2010), the S&P 500 stock index has gained more on a total return basis during the 4th quarter (i.e., October-November-December) than it has during the other 3 quarters combined. The final 3 months of the year have gained +150.9 percent (total return) vs. a gain of +129.2 percent for the first 9 months of the year over the last 2 decades. The 6-month period from November 1 to April 30 for the S&P 500 has produced nearly 8 times as much total return as the 6-month period from May 1 to Oct. 31 since 1990. The index has gained +344% in the (November-April) period vs. +45% in the (May-October) period. The best monthly performance on a total return basis for the S&P 500 during the last decade (2001-2010) has occurred in April, October or November in nine of the 10 years.” (source: BTN Research).
Next, an investor should consider how the stock market has done in the third year of the presidential cycle. “2011 is the 3rd year of the current presidential cycle (2009-12). The last time any “3rd presidential year” resulted in a negative total return for the S&P 500 was 1939 or 72 years ago (source: BTN Research). Using these facts, if history repeats itself or even rhymes, there could be some great opportunities in the stock market during the next few months.
The bad news is, poof, it’s gone. Traditional buy and hold investing, which for many investors didn’t work out well in the last decade, may not be working this decade either. The S&P 500 index opened this decade at a price of 1,116 and grew to a decade high of 1,363 on April 29, 2011. Then in only a few short weeks, the entire decade’s return in the S&P 500 Index disappeared when for a moment during the day on September 22nd the S&P was at 1,114. To make matters worse The S&P 500 closed Sept. 23 at 1,136, down 9.6 percent YTD (total return). Last week’s closing value is 27.4 percent less than the index’s all-time closing high of 1565 which was set on Oct. 9, 2007 or almost four years ago.
Other signs that point to importance of active money management are the rise in volatility, the TED spread, and the recession probability indicator. Volatility increases when stock prices go up and down rapidly over short periods of time which is what we have seen in the last several weeks, in our opinion this points to higher risk.
Next, as the Ted Spread rises, which it has been doing lately, it creates additional concern for us because it points to lenders believing the risk of defaults is increasing. The recession probability indicator attempts to measure the risk of heading into another recession. In August, it was at 38.74 and it jumped to 46.19 in September, which is one of the largest jumps since 2007. Although no one can predict the stock market, as more signs point to increased risk it points out the need to be prepared.
As we head into the month of October, I’m reminded of an old episode of Scooby-Doo, where Shaggy said, “Hold on man. We don’t go anywhere with ‘scary,’ ‘spooky,’ ‘haunted’ or ‘forbidden’ in the title.” All of those terms could be used to describe the stock market and the economy right now. Yet, for the informed investor, who is able to remove their emotions when it comes to investing, looking at history several opportunities and risk are apparent.
The goal would be to identify and take advantage of opportunities and reduce or eliminate risk. Remember by having a plan in place, it will help remove the emotions of investing, and once you have a plan in place you really shouldn’t be too worried right now. Investors who don’t feel they have a solid plan in place, take this time to get inspired, seek knowledge, take action and aim for success.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguys.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc nor its representatives provide tax advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. (419) 842-0550.
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