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  • 1. Stock Market Performance Lessons from History (that we never seem to learn) 2006-2009, Gary R. Evans. This material may be used for non-profit educational use only without permission of the author, Dow Jones Industrial Averages: 1961 - Now 16,000 14,000 Shown are continuous annual growth rates. Turning points are July 1982 12,000 December 1999, and October 2007. 10,000 8,000 15.6% 6,000 8.8% 4,000 2.03% 11.4% 2,000 0 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 08 1
  • 2. Bull/Bear Markets Bull market defined to have ended when stocks fall about 20% from peak Average duration this century: 27 months Very high variance, however Bull market of 1990s lasted more than 10 years Can't predict from this statistic alone. Stock Market Performance What seems to matter ... The stock market likes High growth in earnings or expectations of high growth in earnings Meeting those expectations The River of Money Price stability Momentum Enthusiasm from foreign investors 2
  • 3. Stock Market Performance What seems to matter ... The stock market does not like Missed earnings or performance expectations Inflation High interest rates The stock market seems indifferent to mild recessions, but not major recessions The importance of earnings ... Generally, the stocks that make up the S&P 500 Index respond to the earnings growth rates of the companies. The anomaly in 2002 was because the stock marker crash, or the worst of it, was in tech and dot.com companies that were not in the S&P500. The relationship is robust, with the market leading earnings by about 2 quarters, although that relationship is variable cycle to cycle. 3
  • 4. Dividends Dividends will supplement yields 388 of the S&P500 paid dividends in 2004 Dividend yield averaged 1.8%. The larger the company, the more likely they are to pay dividends, tech and growth companies don't like to pay dividends. Trend is rising because of favorable tax break initiated in 2003 (15%) Dividends (cont) Historically dividends much more important Since 1926, 41% of S&P500 yield Sharp decline in 1980s and 90s Sharply higher overseas New Zealand 4.1%, Australia 3.7%, Italy 32.% Big utilities and income stocks often pay hi Entergy LA Source: WSJ Jan 18 2005 4
  • 5. Yield Comparisons Data assembled by Richard Shaw for the source above. Stocks don't like inflation ... DJIA - The Inflation Years 1971 - 1982 1200 1000 800 600 400 200 0 71 72 73 74 75 76 77 78 79 80 81 82 5
  • 6. DJIA - Moderate Growth 1955 - 1982 1200 1000 800 600 400 200 0 1955 1960 1965 1970 1975 1980 The River of Money Net New Cash Flow to Mutual Funds 500 400 $ billions, 1984 - 2008 2008 is YTD to Nov 2008 300 200 100 0 -100 Excludes Money -200 Market Funds -300 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: Investment Company Institute Stock Mutual Funds All Mutual Funds 6
  • 7. The River of Money (stocks cont) Stock Year Mutual Funds Loss of confidence 84 5.9 85 8.5 after the 87 crash. 86 21.7 87 19.0 88 -16.1 When we see the timing of these down- 89 5.8 turns, we may conclude that this is a public 90 12.9 91 39.9 reaction to a market drop rather than a 92 79.0 cause (although it makes the cycle longer). 93 127.3 94 114.5 95 124.4 96 217.0 Note the 97 227.1 severe decline 98 157.0 99 187.7 in 2001/2002 00 309.3 01 32.3 02 -27.8 03 152.8 ... and decline in 2007 04 177.8 05 135.8 and collapse in 2008 06 159.4 Data at the ICI show that flows into long-term mutual fund IRAs fell 07 92.4 from $171b in 2007 to 0 in 2008 Q2. 08 -215.6 A complication: U.S. investments in foreign stocks through ETFs and mutual funds Once global investment funds, both mutual funds and ETFs, became the rage, then increasing percentages of new equity fund contributions were directed to overseas markets through these funds. This began in 2005 and continued through 2007, but in 2008 and early 2009 the trend has reversed, with those funds now losing cash. The initial impact was to fuel overseas markets. The current effect is to impede their growth. 7
  • 8. Overseas Investors and Investments The depreciation of the dollar complicates this issue: as the dollar depreciates the effective yield to overseas investors buying U.S. stocks and bonds falls. For example, if the dollar to Euro exchange rate rises from $1.10 to $1.20 (this is a dollar depreciation --- the dollar is worth less, the Euro more) then a European investor investing in U.S. stocks would have paid .91 Euros per dollar when buying, but receiving only .83 Euros per dollar if cashing out a year later. When the $ depreciates his should discourage overseas investments in the U.S. But in 2004, when the dollar was depreciating, foreign capital continued to flow in. This appeared to be due to perceptions of quality and safety in a troubled world. Also, when the dollar is thought to be near it's trough, U.S. investments are seen as "on sale," spurring more overseas inflows. This appeared to be happening in early 2005 when the dollar was at $1.33 to the Euro. Obviously, $ depreciation increases yields on U.S. investments made in foreign stocks, but again, at it's trough, these investments are expensive. Dollar to Euro Exchange Rate the cost of a Euro in $$ This would add to the yield of U.S. investments in European 1.80 ETFs, reduce yield on European investments in US stocks. 1.60 1.56 Value for 2009 is for Jan 20 1.40 This is a $ devaluation 1.37 1.29 1.24 1.24 1.26 1.

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