Ufinance.net

The stock market is closely related to the health of corporations so the performance of the stock market often reflects what is going on in the economy.

When downturns come in to the U.S. economy it is also felt in the stock market. If you graphed out all the recessions from 1945-2000 you will see that $1 invested at the end of 1945 becomes $1,000 by the end of 2000. However, the most important aspect of this is to examine the economic recessionary periods and correlate it to the stock market performance. Immediately before, after or during a recession the stock market is almost always affected negatively.

The market continues to perform well despite all the exterior factors that can influence it. The S&P continues its steady rise and it looks like those that called for doom were wrong . . . at least in this short term. Good factors and bad factors alike seem not to shake the market’s movement up Either this is irrational and the end is near or this could be a big climb that is just starting. Watching it play out th rest of 2006 we will see what the long-term really held.

We will examine the historical range of 1970-2000 to see how global markets performed and the risk that went along with these results.

The US averaged a 12.9% return during these years with a peak of 37.4% and trough of -26.5. Now the general international market returned 12.2% with a 69.9% peak and -23.2% trough. Then Europe averaged a 13% gain and had a high of 79.8% and a low of -22.8%. Finally, the Pacific had an 11.9% average with a peak of 107.5% and a low of -34.3%.

This looks like the Pacific had the highest volitility while providing the highest one-year gain. Now Europe had an excellent average return, but the volitility is high as well. The U.S. had a great average with the least amount of volitility. Combining all these classes will lower the overall volitility and allows you to experience big gains.

If you do not invest internationally you are missing out on approximately half of the investable developed stock market opportunities worldwide. While the U.S. does make up 50% of the available investments, by ignoring countries like Japan, England and the like you can be missing some excellent investments. Also, it is important to remember that diversifying your portfolio through international stocks will lower the risk of your overall portfolio.

So look around at some mutual funds that are international types and seek one will solid performance, low expense ratio and is a no-load. Over the long-term this will help your portfolio tremendously and you will see the benefits of exposing yourself to this portion of the market.

P/E is a essential way to determine if the stock market is over and under valued. Here we will examine the historical P/E for the S&P 500. You take the total market value of a company and divide it by the trailing one-year earnings to determine P/E ratios.

Historical P/Es for the S&P 500 have varied much over the years, but in late 1990s when the average peaked at about 35 is right when the tech bubble and the downturn of March 2000 began. For a majority of the time from 1926-2000 you saw P/Es between 10-20 which meant investors were willing to pay between $10 and $20 for a dollar of earnings by a company. Late in the 1990s P/Es had doubled and many saw this as a major sign the market was overpriced–and it was. The market turned in March 2000 and then was hit again when the attacks of 9/11 came. That double whammy hurt investors that got in at the top when P/Es were at 35.

The stock market has showed significant strength lately with oil prices dropping and the Israeli/Lebanon conflict in a cease fire. Investors hope this rally can sustain itself, but we will need to wait and see.

Currently world conditions are relatively stable, however, with so many issues out there anything could happen and the immediate results would not be good for the stock market. Also, if the Fed’s actions in the coming months does not convince investors that the economy is ok that will hurt the stock market as well.

Examine your portfolio and if there is a dog you have been thinking about getting rid of—now is the time. Take advantage of the high market performance while you can because you never know what will happen next.

When looking at annual ranges of returns for asset classes historically you can better understand the risk involved in each investment. Each asset class has some risk; some more than others. If look at the peak and trough of each asset class you will see the inherant risk.

For example, small cap stocks between 1926 and 2000 had a peak of 142% and a trough of -58%. Large caps’ best return was 54% and worst was -43.3%. Long-term government bonds high was 40.4% and low was -9.2%. Intermediate-term government bonds highest return was 29.1% and low was -5.1%. Finally, Treasury bills never returned higher than 14.7% and 0% return was its lowest.

From this information you can conclude that small caps have the most amount of risk because they have the largest difference between their peak and trough and so on down the list.

Investing is risk versus return and these statistics bear that out.

The S&P 500 fell to negative performance YTD after a tough week on Wall Street (June 30th article). Bears are currently dominating trading and it seems like The Herd is almost to a tipping point of negativity. Let’s hope it does not reach that point because that is when millions will follow and make the stock market bump a bruise.

People are particularly nervous because oil has reached a new record high each of the last few days. Oil prices are rising because Israel is taking on Palestine and Lebanon right now and it could make the Middle East even more volatile. The situation in Iraq is no better with an extraordinary amount of sectarian violence this week.

Problems with Iran and North Korea are not helping global stability either. Volitile times like this, as you have seen, negatively affects the stock market. If these problems get worse look for the stock market to reflect that.