Recent is always a relative term. In this case the recent stock market rally is in reference to indexes being at four month highs.
I’ve said before that a likely recovery of our economy would be lead by the stock market. Following closely behind that would be consumer spending, corporate earnings, GDP, and finally employment. This is a long road left to travel, but are we even on that path?
The point of this post is to show neither optimism nor pessimism, only provide clarity. There are two interesting things to learn here.
1) Almost 2 months ago the S&P 500 was hanging out around 675. As of Monday, May 4th, it has broken 900. This is the time of investment return one might expect over a decade, not over 2 months.
2) Even though the S&P 500 broke 900 on May 4th, it was at 930 at the beginning of the year.
What this means is there is an incredible amount of excitement for essentially “not losing any more for the first four months of the year.”
But that statement ignores a few things. If you’re like me, you invest in the stock market every time you receive a paycheck. A simple addition to your 401(k) or IRA is a new investment at current prices. This means you have some investments that are just now breaking even (those bought in January and then went down), and some that could be up as high as 40% from the huge lows back in March (those bought in March). This is a concept known as dollar-cost-averaging. We’ll cover it more another time.
From one perspective we have people noticing that we’re just now breaking even on the year. For other people though we’re in a huge stock market rally. These people are certainly optimists, but they are also realists. Had you sold your stocks back in March, finally giving up on the investing game, you would have missed out on a 40% return only seen as quickly a couple of times every century (that is not a typo).
Now this rally is doing something more than just making people money (those of us that remained in the market at least). Look at CNBC. In the summer of 2007, they were optimistic about the market. In the fall they were concerned. By summer of 2008 CNBC was making documentaries about the “potential depression”. CNBC is notorious for setting the investor tone I’m sure you remember that though I refused to believe we were in a depression, I did admit to the possibility that we were heading towards one. But now CNBC is as excited as Peter Griffin at the Pawtucket Brewery. Media excitement usually creates a surge of investment money back into the stock market. This new investment from sideline investors has the potential the rally the market enough that confidence is restored and the economy can recover.
Like Peter’s famous trip though, over-excitement can lead to damaging results. Peter let himself get too excited at the brewery and he went to try a new product. Not only did the product almost kill him, it got him kicked out of the brewery before he could finish the tour. Those of you familiar with Charlie and the Chocolate Factory may be more familiar with Charlie’s experience. The media hype has the potential to create a false sense of recovery. With new money flooding into the markets we do start to feel better. But what if we get some terrible news? A bad GDP report, hyper-deflation, or big bank failures are all such possibilities. Bad news could send investors running for the hills where we’ll end up worse of than we started (because we have a renewed sense of pessimism).
The lesson here is simple: ignore the media. If you pulled you’re money out and waited for some “recovery” then it is likely you’ve already missed the best returns. If you feel more confident about the market make sure you look at your own situation first. How is your debt level compared to 2 months ago? How is your job stability? How is your savings? There is a good chance that none of these factors has changed much in two months. If they have, it’s likely they haven’t changed for the better. Please ignore the news. The flavor of the week is economic recovery, last week it was pig flu, next week it will be…
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
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Said,
Said,
I totally agree. I’m no expert, but I do enjoy seeing people rewarded for staying the course and not freaking out. I hope the market remains relatively stable whether it trends up or down for the next few months. All this volatility has caused a lot of people to go crazy! (see picture above)
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