Someone’s got a case of the Mondays…

It recently occurred to us that Mondays have been especially bad in the market lately, so we decided to see if this was true.  As it turns out, it is!  Since July 1, the S&P 500 has lost 17%.  Mondays since then have been responsible for a loss in market value of 27%!!!  That’s an average of 2.0% drop for each Monday.  The rest of the week, the market has risen 10%!

Our opinions on why the market is behaving this badly are largely unchanged.  Until something happens to gain their confidence back, investors have lost confidence in the financial system and economy.  We continue to believe that our economy and financial system are totally salvageable.  The Fed, Treasury, and FDIC will not stop at anything in order to restore confidence in the banking system, which will eventually lead to a loosening of credit availability.  Greed on the part of “the survivors” will also return—people looking to take advantage of everyone else’s fear.  This, in turn, will further support market confidence in the bonds and stocks of corporate America.  The new news today is that the most cyclical sectors (like commodities) are vulnerable in the event of a global recession (well, duh), whose odds are increasing, given how emerging market stocks are crumbling and currencies are depreciating.

The behavior of the stock market today supports the idea that we are (hopefully) near the end of the bear market.  Prior to today, the health care and consumer staples sectors had been holding up well, with cyclicals sustaining the brunt of the drop.  Today, everything dropped hard.

Also, by numerous measures, stocks are more oversold than they have ever been, cheaper than they have been in 25 years, and trading at volatility levels last seen in 1998.  The following charts are just 3 that the economists at Strategas put out today.  The first chart shows the 10-year average annual performance of large-cap stocks.  The most recent data point, +2.1%, indicates that stocks have returned 2.1% annually from 10/3/98 to 10/3/08.  As you can see, this is as low as it has been in 180 years.  180 years!!  This doesn’t say anything about the fundamentals of corporate America or about valuations; rather it’s a “technical” indicator which can be used as a measure of just how bad it’s been compared to history.

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The second chart is a combination valuation/technical chart.  It shows how poorly stocks have performed relative to treasury bonds.  The –51.5% (which, after today is closer to -57%, and was probably around –60% midday) means that stocks have dropped 29% in the last year (y/y means year-over-year) and the treasury yield is now 22.5% lower than 1 year ago (3.61%, down from 4.56).  The sum of those is –51.5%.  Today’s number hasn’t been seen in over a half a century.  This is a useful indicator because bonds and stocks normally travel together:  as bond prices rise (and interest rates thus fall), stock prices normally rise too.

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Finally, money market funds haven’t been full of this much money since….well, probably since ever.  This indicator shows how much money is now in relatively safe money market funds, as a % of the value of the Wilshire 5000 (a broad stock index of 5,000 companies).

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As always, please don’t hesitate to call or email us with any questions or concerns about the market!

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