Nowhere to hide; globally, it’s markets see, markets do
The New York Times 14 September 2009
The United States stock market has just completed its best six months since 1933. From March 9 to September 9, the S&P 500 Index leapt 53 per cent.
But the gain over that period, which began when stocks reached their nadir in March, was not enough to offset the losses recorded in the previous six months. Not since 1932 had the market suffered a half-year period as bad as that one.
Investors found it difficult to determine whether the Great Recession would turn into Great Depression II.
Amazingly, however, the US stock market was one of the least volatile markets in the world in the past year. It was among the best markets when it was plunging, and among the worst when it was soaring. Overall, it ranked near the bottom among international markets.
Whatever else you might want to say about the virtues of international diversification, in this cycle it has done little to balance the risks of investing in any one market. When the markets went down, they nearly all went down. When the markets rose, they soared together.
If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since the second world war, there have been eight earlier periods when the S&P 500 managed to rise at least 30 per cent over a half-year period - in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them.
The exception was 1980, when the economy went into a double-dip recession and dashed the hopes of investors who had bet on a continued rise in stock prices.
Before that, the record was less impressive. Soaring prices in 1929 presaged the Depression, and a sharp rebound in 1930 proved to be a suckers’ rally. But big gains in 1932-33 and 1935 were followed by additional gains. Prices were little changed a year after large gains in 1938 and 1943.
There is truth in an old adage: if you lose 50 per cent of your money and then gain 50 per cent, you have not come close to breaking even.
Italy provides one of the best examples of that. Over the six-month period to Wednesday last week, the FTSE/MIB index of Italian stocks rose 81 per cent in euros. With the euro strong against the US dollar during that period, the Italian index more than doubled, rising 109 per cent from the perspective of a dollar-based investor.
But an investor who put money in the Italian stock market exactly one year before suffered a decline of 55 per cent in euros, or 60 per cent in dollars, during the next six months. The Italian market, like the US market, hit bottom on March 9. The net impact: for the 12 months to September 9, the Italian market fell 19 per cent in euros or 17 per cent in dollars.
For the entire year, the best stock market index performances in the Group of 20 countries were turned in by emerging markets, which are back in favour with investors hopeful of a resumption of global growth. China, whose market had plunged earlier than most, was the only one to rise during the six months to March 9 and was the best performer for the year.
Brazil, Indonesia and South Africa also showed gains for the 12 months, while the Indian market broke even and the South Korean market nearly did the same. The largest declines were in Saudi Arabia and Russia, oil producers that suffered from lower oil prices brought on by the global slowdown.
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Nowhere to hide; globally, it’s markets see, markets do
The New York Times
14 September 2009
The United States stock market has just completed its best six months since 1933. From March 9 to September 9, the S&P 500 Index leapt 53 per cent.
But the gain over that period, which began when stocks reached their nadir in March, was not enough to offset the losses recorded in the previous six months. Not since 1932 had the market suffered a half-year period as bad as that one.
Investors found it difficult to determine whether the Great Recession would turn into Great Depression II.
Amazingly, however, the US stock market was one of the least volatile markets in the world in the past year. It was among the best markets when it was plunging, and among the worst when it was soaring. Overall, it ranked near the bottom among international markets.
Whatever else you might want to say about the virtues of international diversification, in this cycle it has done little to balance the risks of investing in any one market. When the markets went down, they nearly all went down. When the markets rose, they soared together.
If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since the second world war, there have been eight earlier periods when the S&P 500 managed to rise at least 30 per cent over a half-year period - in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them.
The exception was 1980, when the economy went into a double-dip recession and dashed the hopes of investors who had bet on a continued rise in stock prices.
Before that, the record was less impressive. Soaring prices in 1929 presaged the Depression, and a sharp rebound in 1930 proved to be a suckers’ rally. But big gains in 1932-33 and 1935 were followed by additional gains. Prices were little changed a year after large gains in 1938 and 1943.
There is truth in an old adage: if you lose 50 per cent of your money and then gain 50 per cent, you have not come close to breaking even.
Italy provides one of the best examples of that. Over the six-month period to Wednesday last week, the FTSE/MIB index of Italian stocks rose 81 per cent in euros. With the euro strong against the US dollar during that period, the Italian index more than doubled, rising 109 per cent from the perspective of a dollar-based investor.
But an investor who put money in the Italian stock market exactly one year before suffered a decline of 55 per cent in euros, or 60 per cent in dollars, during the next six months. The Italian market, like the US market, hit bottom on March 9. The net impact: for the 12 months to September 9, the Italian market fell 19 per cent in euros or 17 per cent in dollars.
For the entire year, the best stock market index performances in the Group of 20 countries were turned in by emerging markets, which are back in favour with investors hopeful of a resumption of global growth. China, whose market had plunged earlier than most, was the only one to rise during the six months to March 9 and was the best performer for the year.
Brazil, Indonesia and South Africa also showed gains for the 12 months, while the Indian market broke even and the South Korean market nearly did the same. The largest declines were in Saudi Arabia and Russia, oil producers that suffered from lower oil prices brought on by the global slowdown.
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