Observations: July 2011 Stock Market Update

Sunday, July 31, 2011

July 2011 Stock Market Update

Sovereign Debt Concerns

In July, sovereign debt issues again took center stage.

For months, fears of Greece defaulting on its debt and triggering a series of dominoes have hung over the market. After some jitters in the first half of the month, a plan was finally put in place to exchange much of the Greek debt for longer maturity (15-30 year) debt. This seems to have resolved the situation, at least for now, and sparked a short-lived relief rally.

Meanwhile, on the home front, the possibility of default on our own debt continued to increase. Lacking an increase in our debt ceiling, the government has been short of funds since May. However, it has managed to finesse the situation with the use of smoke and mirrors. August 2 is the supposed date when it would no longer be possible to keep up the charade. Faced with the possibility of the U.S. government defaulting on an obligation, or losing its AAA bond rating, the market sold off as August 2 approached with no increase in the debt ceiling in sight.

The month closed on a losing streak, losing over 4.5% in the final 6 trading days and closing the month at 12,143.24.

July, Year-To-Date & Recovery-To-Date Review

Here's where we stand vs. some key dates and milestones:

From All-Time High of 14,164 on Oct 9, 2007: the Dow is down 2021 points (14.3%)
From Crash Low of 6547 on March 9, 2009: Up 5596 points (85.5%)
From 52-week High of 12,811 on April 29, 2011: the Dow is down 667 points (5.2%)
From 52-Week Low of 9986 on August 26, 2010: Up 2157 points (21.6%)
From Recent Low of 9986 on August 26, 2010: Up 2157 points (21.6%)
From 2nd Quarter Close of 12,414: The Dow is up 271 points (2.2%)
From December, 2010 Close of 11,578: The Dow is up 566 points (4.9%)
From Prior Month Close of 12,414: The Dow is down 271 points (2.2%)

For other recent results, see June stock market results, and August stock market results.
Note: At the end of the crash, the Dow had lost about 54% of its value (from the all-time high). For an explanation of how it can be up 85% since then and still be almost 15% below the all-time high, see The Importance of Avoiding Large Losses.

Looking Ahead

Is Congress really so dysfunctional that it can't come to an agreement to resolve the debt ceiling issue? My sense is that the market's answer until recently was "Of course not." Now, maybe it's not so sure.

Personally, I expect (pray for?) a last-minute agreement. If they can't reach an agreement, not much else will matter next month; things could really get ugly. (8/7/11 Note: For a somewhat disconcerting look ahead, even given the agreement to increase the debt ceiling, see Mission impossible: stop another recession -- Nouriel Roubini's Aug 7 article in the Financial Times. requires subscription, but it's free.)

The Next 10 Years

Because of somewhat elevated valuations, my stock market projection model projected below average 10-year returns in the neighborhood of 5.4% as of the beginning of the year. Roughly on-trend performance since then suggests little has changed. I'm still expecting 10-year returns in the 5-5.5% neighborhood.

Related Articles & Posts

Three Scenarios for the Economy (and the stock market) includes links to additional relevant articles by Bill Gross, Nouriel Roubini, Jeremy Grantham, John Hussman, and others.
100 Years of Stock Market History: Includes 100-year chart and discussion of the long flat periods.
Dow Yearly Returns: 1929-2010 : bar graph of yearly total returns (i.e., including dividends)
What has the range of returns (minimum & maximum) been for 1,2, 3, ... 100-year periods?
10-Year Stock Market Projection shows how expected returns have changed over the last 10 years.
100 Years of Interest Rate History: graph of Treasury Note interest rates since 1900
Who's Afraid of a Sideways Market?: Interesting perspective on long flat periods from Morningstar.
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This work is licensed under a Creative Commons Attribution 3.0 unported license. Last modified: 9/1/2011