Economic Perspective April 1, 2010

by J. David Lewis

Compared to our “Economic Perspective” commentaries over the last year, this one feels less dramatic.  In the first calendar quarter for 2010, the S&P 500 Index return was 5.39%.  This is quite good, except that it is hard to find excitement compared to the 25.83% S&P return for three months ended May 31, 2009 or 15.93% for the second calendar quarter of 2009.  The return was 49.77% for the last twelve months, which is spectacular.  Yet, the most interesting thing we see now is this quote from Tuesday March 30:  

“NEW YORK (CNNMoney.com) — The Dow Jones industrial average ended at a fresh 18-month high and the rest of the market churned Tuesday as investors weighed a rise in consumer confidence, more weakness in the housing market and a stronger dollar.  The Dow Jones Industrial Average closing at 10,907.42 was the highest finish since 11,143.13 on Sept. 26, 2008.”

That September was a brutal month, with its –8.91% S&P return.  The next month, October 2008, essentially fell off a cliff, with -16.80%.  The significance of this high for eighteen months is that the period started immediately before the most vicious single month of many years.  The S&P is close to climbing back over the edge of that cliff.   Although, we are still below the peaks in 2007, we might see a series of announcements that our markets have passed previous marks that are closer and closer to the all-time high.  It is not a certainty.  It is a reasonable possibility we will continue to see this kind of encouraging news.

As shocking as September and October 2008 were, they passed; just like many other very positive and very negative events in history.  Those who endure the extremes are in far better shape than those who bought at peaks or sold at bottoms.  Decisions are often made in the midst of the extreme times.  As recently as January, there were people who believed another collapse would occur right away.  Some level of stress is still with us.  So, we continue to reinforce an understanding that extremes, both positive and negative, will occur in the future.  They will also be reversed.

We think keeping September and October 2008 in perspective while experiencing this recovery is important.  We do not want readers to forget.  Avoid thinking in terms of “if” there is another bear market (or unbelievable bull market).  Instead, always think “when” there is another bear market (or unbelievable bull market).  With this language in mind, make decisions in calm times that will help you remain steady through either extreme.  Keeping things in perspective is very important. 

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