Tuesday, February 15, 2011

Borrowing Returns from the Future

This post suggests that the price of extraordinary current stock market performance may be decreased future returns.

Starting P/E Ratio vs. 10-Year Stock Market Returns clearly suggested that high initial P/E ratios have a negative impact on subsequent 10-year returns. This post takes the analysis a step further in an attempt to see what we can learn from the "outliers" -- the historical results that are least consistent with the trend line.

Initial P/E Ratio vs. 10-Year Stock Market Performance Revisited


P/E ratio impact on future 10-year performance

Each marker in the chart above (click to expand) represents a year between 1901 and 2010. The placement of the marker indicates the Dow's normalized P/E ratio at the end of that year, and the annualized market return over the ensuing 10 years. The green trend line shows that, in general, every time the P/E ratio increased by 5, the annualized 10-year returns decreased by about 3% per year. (For a more complete explanation of the basic chart, see note at end of post and this post.)

In my experience, it is always helpful to look at the exceptions. So, in this version of the chart, I've added

Tuesday, February 8, 2011

The Importance of Avoiding Large Stock Market Losses

During the recent crash, the stock market fell 54%; since then, it is up over 80% (as of February 1). Why am I still "underwater"? Seems like a reasonable question to ask.

In a recent post, I observed that since the market low of 6547 in March of 2009, the DJIA (Dow Jones Industrial Average) was up over 80%! Yet, it was still more than 15%, and more than 2000 points, below the all-time high of 14,164. How can an 80% gain be less than a 54% loss? Read on....

Gains Needed to Offset Stock Market Losses


impact of stock market losses -- how large losses wipe out much larger gains

The Impact of Large Stock Market Losses

The above chart (click to expand) shows the gain required to offset losses from 0% to 90%. I wanted to go even beyond a 90% loss, but if you want to see what happens beyond that,

Tuesday, February 1, 2011

February 2011 Stock Market Update



January & Recovery-To-Date Review
Note: click here for February data

The market is off to an auspicious start -- which usually bodes well for the year.  In January, the market again set not only a new 52-week high, but a multi-year high as well.  The  DJIA (Dow Jones Industrial Average) closed January at 11,891.93, just below its high for the month of 11,989.83 set on January 27th.  That peak appears to be the highest close since June 17, 2008 -- the last time the market closed above 12,000.

The market is going full speed ahead. It spent the end of January knocking at the door of 12,000.  For five days in a row, the market peaked above 12,000 only to fall back before the close. Here's how the January close stacks up against some benchmark earlier closes:
  • From December/EOY Close of 11,578: The Dow is up 314 point (2.7%)
  • From Recent Low of 9986 on August 26, 2010: Up 1906 points (19.1%)
  • From 52-Week Low of 9686 on July 2, 2010: Up 2205 points (22.8%)!
  • From Crash Low