1. Let’s Put Things in Perspective
September 2011

2. Summary
• This summer’s stock decline was nothing exceptional (only down
8% in July/August)
• The economy doesn’t look that bad
• Equity valuations are O. K.
• Equities tend to perform well over the long-term, sometimes right
after a major correction and/or spike in volatility
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3. Details
• U.S. Stocks have been going up in the long run and outperformed bonds most of the time over any 5-year periods
• Historically stock market declines have been much worse: down 86% in 1929-32, 49% in 2001, 57% in 2007-09…
• Other asset classes have seen much worse decline:
• Long U.S. Treasury Bond real return was negative 67% between 1941 and 1981.
• Gold was down 62% between 1980 and 1986
• Japan Stocks were down 82% between 1990 and 2009
• Most declines have been followed by 5 years of gains
• Nearly every significant up year for the markets had also a significant intra-year decline
• When the volatility is high, markets often rise
• U.S. Companies are in much better shape (profits, cash holdings, dividend payouts) than in 2000
• The Yield curve is usually flat before recessions. It is far from flat now
• When consumer sentiment bottoms, the following 12 months tend to be good for stocks. Extreme pessimism in
consumer confidence may be a bullish sign for the market
• Moderate GDP Growth (2%-3%) has not been bad for stocks historically. But can we keep a 2%+ growth?
• DIVERSIFICATION WORKS!
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4. U.S. Stock Market History: Volatile but Going Up
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5. Stocks Outperformed Bonds Most of 5-Year Periods
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6. Historical Markets Declines: We Have Seen Much Worse
Trough=Bottom - As of Mid August 2011
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7. Many Declines Have Been Followed by 5 Years of Gains
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8. Intra-Year Declines Happen Very Often
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9. When the Volatility is High, Markets Often Increase
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10. U.S. Companies Today vs. 2000
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11. Slowdowns Do Not Mean Recessions All the Time
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12. Initial Job Claims Is Down: Usually, it is Up Before Recession
Recessions are in Grey
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13. Yield Curve is Not Flat: Usually, it is Flat Before a Recession
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14. The Current P/E Ratio is Not High
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15. Consumer Sentiment Bottoms = Good 1-Year Stocks Returns
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16. Leading Indicators Index Does Not Yet Predict a Recession
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17. Moderate GDP Growth (2% - 3%) Has Not Been Bad for Stocks
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18. Cash Underperformed Historically Over 1-Year Periods
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19. Diversification Works
• If you had a “All Cash Portfolio” between January 2008 to April 2011, your portfolio
returns would have been 0.2%.
• If you had a “All Stock Portfolio” between January 2008 to April 2011, your portfolio
returns would have been 3.1%. Your portfolio would have been very volatile. Down 48%
then up 20%.
• If you had a “Diversified Portfolio” between January 2008 to April 2011, your portfolio
returns would have been 8.1%.
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20. Quote
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