Stock Market Report, March-September 2009

We have all seen (and felt) the stock market drop to new lows in March 2009. Since then, the market has rebounded and recovered approximately one-third of the losses it had sustained. How was the stock market able to get back this much within the last six months? The answer to this question has three components to it.

The first part is relatively straightforward. In a steep selloff, the stock market always overcorrects itself, such that the market is realistically lower than it should be. Hence, by pure reflex action, the stock market bounces up. Therefore, the first leg up is termed as the dead cat bounce (the saying goes, “even a dead cat bounces”).

The next component is government support. The Federal Reserve and Treasury have poured hundreds of billions of dollars into financial institutions and businesses to shore up and stabilize the economy. This shoring creates a floor in which the stock market can build off of.

The last thing is that many companies have been able to maintain their profit margins throughout this crisis. This may come to you as a surprise; however, the answer is quite logical. The value of a stock is primarily governed by the company’s ability to generate a profit. The basic definition of a profit is revenues minus expenses. Since the economic crisis began, we know that revenues have dropped as Americans have curtailed their spending. Therefore, the only way companies could maintain their profit margins was to slash costs. All the job layoffs and budget cuts you heard about on the news have gone to cut costs to maintain profit margins. As earnings were reported on Wall Street, stocks made nice moves upwards as these reports were better than expected.

These three components have worked together to provide a good start to rebuilding the stock market. Remember, however, that we have only regained one-third of stock market losses incurred. Therefore, the next question is: What will it take to get the rest back? We will cover that topic in the next post.

Beauty Is Only Skin Deep

If you have been following the basic financial news headlines, then you might have heard how the experts are saying that the recession is over and the recovery is beginning.  They point to various indicators such as the stock market as proof. Consumer confidence has moved up for the first time in a year and most people are beginning to believe the worst is over.

However, imagine the total economy is an apple.  On the outside, it looks red and shiny and tasty.  Every once in awhile, though, you will bite into it and find you actually have a rotten piece of fruit.

Well, do you want to know what the core of the US economy looks like?  Then go to this website.

www.usdebtclock.org

What does this actually mean?  It means that whatever recovery is going on now is just a patch job, and future disruptions are inevitable because the core of the economy is rotten.

So How You Doing?

It's funny how lying with statistics can really give you a false sense of confidence.  I have been watching various financial programs and the experts say that we are at the beginning of a new bull market and that since March, the stock market has been up over 50%.  Sounds like great news, doesn't it?  Everything is fine and dandy.  That is, until you look from a slighty different perspective.

Most people did not start investing in March 2009.  If we had started right there, sure, I would be perfectly happy with a 50% gain.  The problem is that we were investing way before then.  Therefore, we really need to start counting from the last peak of the market.

In October 2007, both the S&P500 and the Dow Jones peaked.  For simplicity purposes, I will only use the S&P500 since it covers a broader range of stocks.  Now, the S&P500 peaked at 1562.  It then plunged to a low of 676 in March 2009, and since then has rebounded to 1044.  Therefore, while the S&P500 has increased by 54% since March, the market is still down 33% from its October 2007 peak.  From up 54% to down 33%, that is a huge swing and one that the media is reluctant to tell you.

Now, a more important question to you, is how is your portfolio performing? If you did nothing, either by putting your head in the sand or clutching to the "buy and hold" methodology, it is most likely that your portfolio is still down 30% or so, shadowing the performance of the S&P500.

However, if you had implemented some of those tips I had in the essays I had written during the start of this economic crisis, chances are probably doing better than the market.  You may not be even yet, but you are probably down somewhere in the 15% range.

Now, not to brag, but to provide perspective, this week I reached break even.  My portfolio reached its October 2007 value for the first time in nearly two years.  Instead of continuing to struggle with trying to recover what I lost, I can now move forward.  It is important to note that I did not have some miracle plan or magic bullet for recovering my losses.  I used what I have learned about finances over the last five years to make some key adjustments such that the crisis was just a glancing blow, not a knockout punch.  Hopefully, you have also learned and have made some changes as well, instead of sticking with the status quo.

So, two years into this economic crisis, how are you doing?

Answer To The Quiz

In a previous post, I proposed a simple problem and a question. Here it is again:

Let's say you make $5000 a month. However, over the last decade you have been spending $7000 a month. So you've built yourself quite a little debt pile. Okay, now times are tough and you decide that you need to cut your spending. You decide to cut your spending to $5500 a month.

Here's the quiz: Will you get out of debt?

Now it should be obvious that the answer is no. Even though you have cut your spending, you are still spending more than you are earning.  Therefore, you are not decreasing your debt, you are actually increasing it.

So here is the same quiz in a different context.  When United States politicians proudly inform us that they will trim the budget deficit from the $1.75 trillion this year to about $500 billion by about 2012 (give or take a few years), will we finally start paying off the national debt of over $11 trillion?  Even if they keep their promise, the answer again is obviously no.  Trimming a budget deficit does the national debt no good because we are still racking up debt.

So the next time a politician starts rambling about cutting the deficit, ask him/her what their plan is to create a surplus to pay off the national debt.  That should stump them good.

Subliminal Advertising No More

Way back in Topic 4 I talked about how advertisers were trying to get the message across that you needed their product now and how they would use subliminal tactics to achieve it.  However, in this new economic reality, subliminal advertising is no longer as effective.

Therefore, for those of you who still watch television, has anyone noticed that commercials have become far more blatant in telling you to buy it now?  Words such as want, need, and save are now verbally stated (or more sadly, sung) in commercials, as well as volume and colors seemed to be turned up.  It is as if every advertiser has become a used car salesperson.

The only commercials that do not seem to have changed are the wonderful medicines that make our life better.  That's because you need to consult with your doctor first and the FDA monitors those types of commercials.  Speaking of which, I now have a sudden urge to get longer eyelashes...

Is It Wrong To Save Money?

I was listening to some of the financial reports from the G-20 summit in Pittsburgh and I heard an politician basically say that they needed to figure out a way to have China save less.  I also heard President Bush say the same thing last year when the Chinese visited the White House.

Since when was saving money a bad thing? Well, considering these are the same politicians that have run up an $11 trillion debt, it should not be surprising.

A Quiz

Let's say you make $5000 a month.  However, over the last decade you have been spending $7000 a month.  So you've built yourself quite a little debt pile.  Okay, now times are tough and you decide that you need to cut your spending.  You decide to cut your spending to $5500 a month.

Here's the quiz: Will you get out of debt?

The answer to this question to follow...

Welcome!

Well, it's been quite awhile since writing all those financial essays for the EBFLC. A lot has happened since then, but I did not want to continue beating people over the head with the same stuff during such a rough time. I still have a lot of ideas, but most of the major concepts were written up in my essays. Therefore, I have decided to start this blog for posting little tidbits of financial information that I might come across or think up every now and then. If you somehow have misplaced those essays or just want another copy of them, please feel free to send me an email at ebflc2009@gmail.com and I will be happy to send them to you.