Another excellent post from my favorite author Weston Wellington with Dimensional Fund Advisors:
US stocks extended their winning streak as the S&P 500® Index jumped 7.41% in July; it was the first time since 2003 that the index rose by 1% or more for five consecutive months. Total return for the March 2009-July 2009 period was 35.7%, the strongest five-month period since 1938. The old Wall Street adage that “A bull market climbs a wall of worry” never seemed more appropriate as investors were confronted with a daunting list of worrisome news announcements:
* March 5: Wells Fargo & Co. slashes the dividend 85%, following similar cuts by J.P. Morgan Chase and PNC Financial Services Group.
* April 9: Berkshire Hathaway Inc. loses its longstanding AAA credit rating from Moody’s.
* April 29: World Health Organization upgrades swine flu pandemic to a level-five alert.
* April 30: Chrysler files for bankruptcy.
* May 25: North Korea conducts nuclear missile tests in defiance of international condemnation.
* June 1: General Motors files for bankruptcy.
* June 29: Bernard Madoff is sentenced to 150 years in prison for defrauding thousands of investors.
* July 1: Strapped for cash, California prepares to issue IOUs in lieu of tax refunds.
Many observers dismissed the recent rise in stock prices as an aberration that would soon be rectified. It may be too soon for the bulls to declare victory, but the following sample of observations suggests that predicting the course of stock prices is often an invitation to embarrassment.
“Dividend cuts have undermined the rationale that high dividend yields for global benchmarks are a buy signal for equities.”
—Michael Mackenzie and David Oakley, “US Faces Worst Year for Cuts to Dividends since 1938,” Financial Times, March 3, 2009.
“Commercial real estate loans are going sour at an accelerating pace, threatening to cause tens of billions in losses to banks already hurt by the housing downturn.”
—Lingling, “Commercial Property Faces Crisis,” Wall Street Journal, March 26, 2009.
“Without a sustained improvement in the credit market—the seat of the crisis—it seems irrational to expect a durable move higher in equities.”
—Richard Barley, “Bond Markets Don’t Buy the Rally,” Wall Street Journal, March 26, 2009.
“A record number of consumers are falling delinquent or into default on their loans, a problem that some economists say will only get worse this year.”
—Kathy Chu, “Consumers Fall Behind on Loans at Record Rate,” USA Today, April 6, 2009.
“New research shows corporate bonds have been far better at predicting where the economy is headed than anyone thought. Unfortunately, that suggests the economy is going to get much worse.”
—Justin Lahart, “A Warning from the Bond Market,” Wall Street Journal, April 9, 2009.
“The March stock market rally that fuelled hopes of a broader economic recovery was deceptive because ‘real money’ investors remained on the sidelines.”
—Anuj Gangahr and Chrystia Freeland, “Head of NYSE Cautious over Rally in March,” Financial Times, April 16, 2009.
“Lending at the biggest US banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.”
—David Enrich and Michael R. Crittenden, “Bank Lending Keeps Dropping,” Wall Street Journal, April 20, 2009.
“The US economy appears doomed to enter an enduring episode of unimpressive growth.”
—David J. Lynch, “US May Face Years of Sluggish Growth,” USA Today, May 8, 2009.
“April saw the lowest level of insider buying ever recorded by research group TrimTabs, with insider selling fourteen times as high. Likewise, companies sold 64% more shares than they bought in April.”
—Spencer Jakab, “Beware the Seductive Appeal of the Sucker’s Rally,” Financial Times, May 9, 2009.
“Markets need volume to sustain bull runs, but unfortunately this run does not have it. In fact, trading volume on the New York Stock Exchange has been trending lower all month.”
—Michael Kahn, “This Bear Should Stay Well Fed,” Barron’s, May 20, 2009.
“We are still a long way from a viable, solvent banking system that intermediates credit independently.”
—George Magnus, “Reasons Why Bear Market Rally Will Stall and Reverse,” Financial Times, May 21, 2009.
“The bad news is that this recession fully matches the early part of the Great Depression . . . Global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely.”
—Martin Wolf, “How Today’s Global Recession Tracks the Great Depression,” Financial Times, June 17, 2009.
“The economy is still declining. Credit isn’t coming back. Unemployment is rising, and we are seeing a much less robust consumer. I think the market at some point is going to give back a large portion of these gains.”
—E.S. Browning, “Is the Bull Run Pulling Up Lame?” Wall Street Journal, June 22, 2009. Quotation attributed to Michael Farr, president of Farr, Miller & Washington.
“US stocks took a pounding yesterday, with the benchmark S&P 500 Index turning negative for the year as investors reacted to data showing many more people lost their jobs in June than expected.”
—Kiran Stacey, “Stocks Pummelled as S&P 500 Turns Negative for Year,” Financial Times, July 3, 2009.
“The average length of unemployment is higher than it’s been since government reports began tracking the data in 1948.”
—Mortimer Zuckerman, “The Economy Is Even Worse Than You Think,” Wall Street Journal, July 14, 2009.
Eckblad, Marshall, and Mike Barris. “Wells Fargo Cuts Quarterly Dividend.” Wall Street Journal, March 6, 2009.
Economist. “Watching Nervously.” Global Health, May 2, 2009.
Patterson, Scott. “Moody’s Strips Berkshire of Top Rating.” Wall Street Journal, April 9, 2009.
S&P. The S&P data are provided by Standard and Poor’s Index Services Group.
Yahoo! Inc. Yahoo! Finance. In www.yahoo.com, accessed August 3, 2009.
