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Worst May on Dow Since 1940 - Week Ended 5/28/10
posted 06.01.2010 at 3:54 p.m. by steve
Sell in May and go away so the old saying goes; it is probably one which many investors wish they had followed this year. Despite the strong performance of Thursday, and a week that was overall flat, the Dow finished May with its worst percentage loss since 1940. The index lost -7.92% for the month with others down a similar degree and moves the market officially into correction mode defined as a decline of more than 10%. Since April 23, the market has generally been sliding downward, with the S&P failing to have experienced two consecutive days of positive performance since that time. Ultimately, global economic and financial worries were the root of the problems for financial markets during the month. European debt, financial regulation and diplomatic tensions combined during the month, proving to be a toxic brew for both equity and credit markets. Indeed, the credit markets have been showing some early signs of stress; we need to see this abate. Fear of contagion has likely caused the slide in stock prices to become overblown, but it does seem that the economic conditions and facts are changing.
It is worth acknowledging the economy remains in an improving trend, but a soft patch does seem to be upon us as the most current measures of consumer confidence and spending have slowed the pace of their recovery. Economic data has lost some of its exciting tone in recent weeks. Much of that is likely attributable to the stock market and its recent slide, leaving people feeling shaky. Still, we believe that stronger corporate earnings (profits) and new hiring will continue to feed upon themselves and continue the positive feedback loop that seems to be developing. One of the biggest reasons why we feel the current market has more room to run is that the stock market recovery still trails by a wide margin the recovery that has been experienced for real GDP (key measure of economic activity). In terms of economic productivity, the US economy has largely recovered most of what it lost from 4Q 2007 to early 2009; meanwhile the S&P remains almost 30% below its October 2007 peak.
Corrections like the one currently being experienced are never fun. However, history does provide context for what investors might expect. For instance, in 1932, following an +86% run there was a correction of -30% before the market resumed its upward trajectory and rose another +102%. Investors are likely to feel very skittish following one of the worst bear markets in history, but there are many reasons to try and remain optimistic. Stay tuned for our monthly commentary later this week as we will provide additional perspective.