Let’s Put Things in Perspective
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The document summarizes that: 1) The recent summer stock market decline was relatively small compared to past corrections. 2) The US economy and company fundamentals do not indicate an impending recession. 3) Stock valuations remain reasonable given long-term market trends of volatility followed by growth.
Let’s Put Things in Perspective
- 1. Let’s Put Things in Perspective September 2011
- 2. Summary • This summer’s stock decline was nothing exceptional (only down 8% in July/August) • The economy doesn’t look that bad • Equity valuations are O. K. • Equities tend to perform well over the long-term, sometimes right after a major correction and/or spike in volatility © 2011 Bourbon Financial Management, LLC 2
- 3. Details • U.S. Stocks have been going up in the long run and outperformed bonds most of the time over any 5-year periods • Historically stock market declines have been much worse: down 86% in 1929-32, 49% in 2001, 57% in 2007-09… • Other asset classes have seen much worse decline: • Long U.S. Treasury Bond real return was negative 67% between 1941 and 1981. • Gold was down 62% between 1980 and 1986 • Japan Stocks were down 82% between 1990 and 2009 • Most declines have been followed by 5 years of gains • Nearly every significant up year for the markets had also a significant intra-year decline • When the volatility is high, markets often rise • U.S. Companies are in much better shape (profits, cash holdings, dividend payouts) than in 2000 • The Yield curve is usually flat before recessions. It is far from flat now • When consumer sentiment bottoms, the following 12 months tend to be good for stocks. Extreme pessimism in consumer confidence may be a bullish sign for the market • Moderate GDP Growth (2%-3%) has not been bad for stocks historically. But can we keep a 2%+ growth? • DIVERSIFICATION WORKS! © 2011 Bourbon Financial Management, LLC 3
- 4. U.S. Stock Market History: Volatile but Going Up © 2011 Bourbon Financial Management, LLC 4
- 5. Stocks Outperformed Bonds Most of 5-Year Periods © 2011 Bourbon Financial Management, LLC 5
- 6. Historical Markets Declines: We Have Seen Much Worse Trough=Bottom - As of Mid August 2011 © 2011 Bourbon Financial Management, LLC 6
- 7. Many Declines Have Been Followed by 5 Years of Gains © 2011 Bourbon Financial Management, LLC 7
- 8. Intra-Year Declines Happen Very Often © 2011 Bourbon Financial Management, LLC 8
- 9. When the Volatility is High, Markets Often Increase © 2011 Bourbon Financial Management, LLC 9
- 10. U.S. Companies Today vs. 2000 © 2011 Bourbon Financial Management, LLC 10
- 11. Slowdowns Do Not Mean Recessions All the Time © 2011 Bourbon Financial Management, LLC 11
- 12. Initial Job Claims Is Down: Usually, it is Up Before Recession Recessions are in Grey © 2011 Bourbon Financial Management, LLC 12
- 13. Yield Curve is Not Flat: Usually, it is Flat Before a Recession © 2011 Bourbon Financial Management, LLC 13
- 14. The Current P/E Ratio is Not High © 2011 Bourbon Financial Management, LLC 14
- 15. Consumer Sentiment Bottoms = Good 1-Year Stocks Returns © 2011 Bourbon Financial Management, LLC 15
- 16. Leading Indicators Index Does Not Yet Predict a Recession © 2011 Bourbon Financial Management, LLC 16
- 17. Moderate GDP Growth (2% - 3%) Has Not Been Bad for Stocks © 2011 Bourbon Financial Management, LLC 17
- 18. Cash Underperformed Historically Over 1-Year Periods © 2011 Bourbon Financial Management, LLC 18
- 19. Diversification Works • If you had a “All Cash Portfolio” between January 2008 to April 2011, your portfolio returns would have been 0.2%. • If you had a “All Stock Portfolio” between January 2008 to April 2011, your portfolio returns would have been 3.1%. Your portfolio would have been very volatile. Down 48% then up 20%. • If you had a “Diversified Portfolio” between January 2008 to April 2011, your portfolio returns would have been 8.1%. © 2011 Bourbon Financial Management, LLC 19
- 20. Quote © 2011 Bourbon Financial Management, LLC 20