Penn State's Lehigh Valley campus in Saucon Valley, PA.
photo credit: Kate Morgan |
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THE MARKETS |
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On Wednesday of
last week, the S&P 500 index reached a milestone that has occurred only three
other times since World War II.
The rare
occurrence was this - the index closed 20% above
its 200-day moving average. The other three times it happened were 1975, 1982,
and 1986, according to Bloomberg.
So, how did the
stock market perform subsequent to those feats? Well, the news is good for the
bulls. A year later, the index had gains ranging from 13% to 20%, according to
a research note from Birinyi Associates as quoted by Bloomberg.
On a longer-term
basis, both 1982 and 1986 turned out to be good times to invest in the market.
Starting in August 1982, the stock market took off on a nearly 18-year secular
bull market that was one of the greatest in history. Conversely, if you got in back
in 1975, you had to wait seven years before starting to participate in the new
bull that began in 1982.
We will need the
benefit of history to know if last week's piercing of 20% above the 200-day
moving average foreshadows a new, long-term secular bull market. However, we
have enough history to know the current rally is very impressive indeed.
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Data as of 9/18/09
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1-WK
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YTD
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1-YR
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3-YR
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5-YR
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10-YR
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Standard
& Poor's 500 (Domestic Stocks)
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2.5%
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18.3%
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-14.9%
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-6.8%
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-1.0%
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-2.2%
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DJ
Global ex US (Foreign Stocks)
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1.6
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36.5
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3.3
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-3.0
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6.0
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1.9
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10-year
Treasury Note (Yield Only)
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3.5
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N/A
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3.4
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4.8
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4.1
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5.9
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Gold
(per ounce)
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0.4
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16.4
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17.3
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20.4
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20.1
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14.8
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DJ-UBS
Commodity Index
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3.0
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8.8
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-25.8
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-7.2
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-2.6
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3.6
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DJ
Equity All REIT TR Index
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8.6
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22.4
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-28.4
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-10.9
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2.6
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10.1
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Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT TR Index does include reinvested dividends and the three-,
five-, and 10-year returns are annualized; and the 10-year Treasury Note is
simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's,
djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future
results. Indices are unmanaged and
cannot be invested into directly. N/A
means not applicable or not available.
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A CONCEPT KNOWN AS "ANCHORING"
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A concept known as "anchoring" may influence whether the stock market is
due for a correction or not. In a famous 1974 paper titled, Judgment Under Uncertainty: Heuristics and
Biases, Amos Tversky and Daniel Kahneman defined anchoring as follows:
In many
situations, people make estimates by starting from an initial value that is
adjusted to yield the final answer. The initial value, or starting point, may
be suggested by the formulation of the problem, or it may be the result of a
partial computation. In either case, adjustments are typically insufficient.
That is, different starting points yield different estimates, which are biased
toward the initial values. We call this phenomenon anchoring.
As it relates to
the stock market, what you pick as your "initial value" may greatly influence
whether you are bullish or bearish right now. Let's illustrate this point using
two hypothetical investors.
I. M. Bearish picks
the March 9, 2009 bear market low close of 676 on the S&P 500 index as his initial
value. This is his anchor.
I. M. Bullish picks
the October 9, 2007 all-time closing high of 1,565 on the S&P 500 index as
her initial value, and, hence, her anchor.
From the
standpoint of I. M. Bearish, he looks at the 58% increase in the S&P 500
index between the March 9 low and last Friday and says, "After that incredible
rise, this market is way overdue for a correction." Conversely, I. M. Bullish
looks at the 31% decline in the S&P 500 between the October 9, 2007 high
and last Friday and says, "This market has lots of room to soar since it is
still well below its all-time high."
The concept of
anchoring is critically important for investors because where you plant your
anchor could either limit or expand your ability to understand extreme moves in
the market. Anchoring on the March 9 low makes it difficult to fathom that the
market can keep moving higher. Anchoring on the October 9 all-time high gives
you the green light to think it can keep going up.
Anchoring
applies to life, too. Dwell on an unhappy past and you are effectively tossing
your anchor in a stormy sea. Focus on the possibility of a bright future and
you are effectively setting sail in the azure waters of an exotic location.
Some people might simply call this being a pessimist or an optimist.
Knowing where to
"anchor your anchor" could be the difference between success or failure - in
the markets and in life.
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THINK ABOUT IT
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"When one door
closes another door opens; but, we so often look so long and so regretfully
upon the closed door, we do not see the ones which open for us."
-- Alexander
Graham Bell |
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Mary L. Nothelfer, CFP® Emilio
J. Morrone, CPA, CFP®
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Securities
offered through LPL Financial, Member FINRA/SIPC.
*
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities
considered to be representative of the stock market in general.
*
The DJ Global ex US is an unmanaged group of non-U.S. securities designed to
reflect the performance of the global equity securities that have readily
available prices.
*
The 10-year Treasury Note represents debt owed by the United States Treasury to
the public. Since the U.S. Government is seen as a risk-free borrower,
investors use the 10-year Treasury Note as a benchmark for the long-term bond
market.
*
Gold represents the London
afternoon gold price fix as reported by the London Bullion Market Association.
*
The DJ Commodity Index is designed to be a highly liquid and diversified
benchmark for the commodity futures market. The Index is composed of futures
contracts on 19 physical commodities and was launched on July 14, 1998.
*
The DJ Equity All REIT TR Index measures the total return performance of the
equity subcategory of the Real Estate Investment Trust (REIT) industry as
calculated by Dow Jones.
* Yahoo!
Finance is the source for any reference to the performance of an index between
two specific periods.
*
Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
*
Past performance does not guarantee future results.
*
You cannot invest directly in an index.
*
Consult your financial professional before making any investment decision.
* This
newsletter was prepared by PEAK.
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