It has been a little over thirteen months since the S&P 500® reached its low last year of 676.53. As I am writing this, the index is currently 1,193.40 representing a 76.40 percent gain from its low. As scary as 2009 started, the resulting move up in the indexes was an opportunity that does not come along very often.
Just where does this put the market in respect to its prior high and perhaps, its future direction? The past high for this index was October 9, 2007 when it closed at 1,565.15. Thus, today’s value reflects a 23.75 percent drop from its peak value and would require a move up of 31.15 percent to return to its highest level. In the market’s history, this index has always recovered and set new highs. Should this trend continue, participating in a 31.15 percent move up in the market would be worthwhile. The question is how long will it take to return to its past high?
In the event the S&P 500 takes three years to retrace this part of its decline, would it be worth riding along? To take three years, the index would move up 112.90 points in the first year, 123.58 in the second and finally 135.27 points in the third year. This certainly is not as significant as the 516.87 point move up in thirteen months, so is it still worth it? This actually represents a 9.46 percent move per year! Hardly something most investors would complain about. Thus, if the markets continue their trek up and perhaps move at even a quicker pace from time-to-time due to the start of recovery in jobs, then the returns could be even better. If the S&P 500 reaches its past high in just two years, that will represent over a 14 percent move per year.
For the remainder of this year markets will be in what I refer to as no man’s land. There will be times when good financial news will actual drive the markets higher. And then again, other good news may create a sell off. The same can be said about bad news; some bad news may cause the markets to drop while other news may create a rally. This type of reaction is not really a reaction to the news itself but more to the impact the news may have on other market factors. The primary factor is the Federal Funds rate and whether the Federal Reserve takes steps to increase the rates.
While the markets know the rates must move back to a more moderate level, they also want them to stay as low as possible for as long as possible. Thus, occasionally bad market news may imply the Federal Reserve can continue its current positioning, thus not increase rates. This often creates a small rally in the market if the anticipation was a rate increase.
It is all of these changes and knowing what news may impact what action that advisors managing funds watch carefully every day. It is also the cause for most managers to be gray headed or to be hair challenged.
Despite the political bickering that is taking place, I believe the U.S. economy will continue to show signs of improvement. We may experience more weakness abroad due to additional rating reductions or other actions, but its impact on the U.S. markets may be minimal.
All of this being said, managing investments requires a watchful eye as conditions may change quickly or other factors, such as the inquiries into Goldman Sachs, may have significant impact on the financial markets.
For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.