Snowstorm Continued

The last newsletter talked about having a snowstorm in the stock market. The snowstorm continued this past week but with all stock market indexes fallling further even with positive news in the growth of the economy with a 5.7% annual increase in GDP. Maybe, I should stop writing about snow as Hickory got 8 inches of snow this weekend. More snow related facts are at the bottom.

While January started off well in the stock market, the last few weeks have been very frustrating. For the month, all stock market indexes have gone down. What does this mean for the rest of the year, should we buy, sell, or hold onto stocks and stock mutual funds? Some journalists are writing that the January results are an indicator for the rest of the year. History would suggest otherwise as shown below.

Below is the historical data that I copied from a Fidelity website.

In one of the most dramatic comebacks in U.S. stock market history, the S&P 500® Index rallied a remarkable 65% from its March 9 low to December 31, 2009. The speed and magnitude of this snapback caught many by surprise. Now the big question is: Does this rally have legs?

History is not always prologue, of course. But if it does repeat itself, the market may have room for additional gains in 2010, though likely at a slower pace than in 2009. Compared with 13 bear market recoveries since 1929, the 2009 stock market rebound is one of the most robust ever. The S&P's 65% rise from March 9 to December 31, 2009, is more than a third higher than the average 46% rebound in the first year of new bull markets. The 2009 rally even beats the average two-year return of 57% in prior bull market recoveries.

Have stocks bounced too far too fast?
The S&P 500 Index is still 29% below its level prior to the start of the bear market in October 2007, which is significantly lower than the -14% average (-8% median) return of all prior bear-bull cycles (through first year of each new bull market). Of course, the recent stock market meltdown was the third worse of similar magnitude since the 1929-2009 time period. If you compare where the market is today to where it was a year after downturns of comparable severity, we're in the same ballpark. After the 1937-1942 downturn, the S&P was still 39% below its precrash high, and a year after the 2000-2002 downturn, the S&P was down 32% from its previous high. A year after the 1973-1974 bear market, the S&P was down 29% from its prior high. That's almost exactly where we are today.

What about tomorrow?
Well, no one can say for sure whether the stock market rebound will continue through 2010, and past performance is no guarantee of future results. But historically, stocks have continued to rise during the second year of a bull market, and have recouped most of their bear market losses by the end of the second year. On average, the market was down 5% from its precrash high two years into a new bull market. After severe bear markets, the full-cycle recovery took longer. For example, two years after the 1973-74 bear market, the S&P was still 13% below its precrash high. After the 2000-2002 drop, the market was down 26%. But in 12 out of 13 bear-bull market cycles, gains continued during the second year of the recovery, just at a slower pace.

Investment implications
Like a rubber band that's been stretched and let go, the biggest gains after bear markets have tended to come in the early snapback phase. But history shows that the stock market typically rallied through the second year of the recovery, albeit more gradually than during the first. Investors should note that the market's current bear-bull cycle is roughly in line with prior ones in which stocks generally continued to advance.

My bottom line: I am buying and holding stocks and stock mutual funds.

Snow facts:

Every snowflake has its own unique shape and is different than all other snowflakes. All snowflakes have six sides.

Snowflakes aren't always white. Years ago, when coal was used in factories and homes, snow was often gray. Why? Because the coal dust entered the air and was absorbed by the clouds. In Prince Edward Island, Canada, where the soil is red clay, snowflakes often look pink. Why? Because red dust from the soil is blown into the air and absorbed by the clouds.

The largest snowflakes ever recorded fell in the state of Montana in the United States of America. The snowflakes were 15 inches in diameter.

The snow capital of the United States is Stampede Pass in Washington State. Each year, the average snowfall is 430 inches.

The average snowflake falls at a speed of 3.1 miles per hour.

A blizzard occurs when you can't see for 1/4 mile. The winds are always 35 miles an hour or more. The storm must last at least 3 hours to be classed as a blizzard. If any of these conditions are less, it is only a snowstorm.