Posts Tagged ‘history’

I just got back in town yesterday from a trip with my wife Cheri.  We were celebrating 10 great years together.  So, I am a little out of touch with the economic data that has come out last week.  Plus, this is a slow time of the year.  The real action in the stock market should kick into gear following Labor Day.  I wanted to share with you something that I wrote in my letter to my clients this morning.

It wasn’t until last night that I realized how fortunate we were in going to Cabo last week versus this week.  I discovered that a monster hurricane, Hurricane Jimena, is barreling towards Cabo. This could actually be a Category 5 hurricane by the time that it makes landfall. 

While in Cabo we took an excursion into the city.  People were having a great time in Cabo.  In fact, there was not even a mention of the Category 4 hurricane heading their way.  Residents acted as if there was not a care in the world.  One tourist commented to a reporter, “Are you saying it would be a good idea to stock up?  No fear. I’ve been through tornados and earthquakes and everything else, but never a hurricane.”  There was almost an arrogance that came with that reply.  I don’t believe that there is anything to joke about when it comes to Category 4 or 5 hurricanes. 

It is a common attitude with people who are facing the arrival of a hurricane.  There is the notion that it will miss us or it will not be a big deal.  It is almost as if it could never happen.  These things are always forecasted as potentially being bad and they never turn out to be.

I think that the general attitude about the stock market is the same right now.  The attitude is that there is no way we are going to see a steep decline in the stock market.  There is no way that we are going to decline back down to where we were in March of this year.  There is no way that the worst is yet to come.  Don’t you look at history?  Plus, all of the financial press says that the worst is behind us.  These are the types of things that you hear these days.

This is a big bet to make against this financial crisis.  Just like a Category 5 hurricane, there are enormous penalties for those who blow this off and don’t take precautions.  As an investor, I think that it is prudent to face the upcoming months as if a Category 5 financial hurricane were brewing and potentially heading our way.  After all, we are heading into the particularly dangerous months of September and October.  These are two months that have not historically been kind to investors.

I think that Proverbs 22:3 says it best:

 A prudent person foresees danger and takes precautions.  The simpleton goes blindly on and suffers the consequences.

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Brand New Prudent Money Blog – May 12 -Could the Government be Under-reporting the Jobless by 50%?

There is an old saying in the stock market that you should sell (stocks) in May. It is based on the notion that stocks perform better the 6 months leading up to May (November to April) than the 6 months following May.  There are some interesting statistics that support that notion.

John Mauldin’s newsletter is something every investor should be reading.  He writes a weekly newsletter that he publishes for free.  The content is excellent and he should be charging for this newsletter.  For more information, go to www.frontlinethoughts.com.   He had an excellent newsletter that highlighted this same notion but looked at it when the stock market was in a bear market.  First he took a look at the average returns since 1950 in the S&P 500.

You can see the big difference in returns when looking at separate 6 month periods.

Now take a look at these same numbers but looking at it when the stock market was in a bear market.

The numbers on average are much lower.  It illustrates to me that we could be heading for a rough period, for the market, if historical norms hold up.  If you see what history has to say, you look at the warning signs, the indicators are flashing and considering that we are in the worst bear market since the Great Depression, the risk level is getting higher

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