Thursday, September 1, 2011

August 2011 Stock Market Update

S&P Downgrades U.S. Debt

Even though Congress reached an early-August, last minute agreement to raise the debt ceiling, and thus eliminated the possibility of a first-ever U.S. default, the month did not start well. Subsequently, continuing concerns about the European and U.S. economies, and the first-ever downgrade of U.S. debt (from AAA to AA+) by S&P resulted in the worst monthly market performance since August of last year -- a drop of 4.4%.

It was also one of the most volatile months in recent memory. Of 23 trading days, 15 showed a gain or loss of 1% or more; seven showed a gain or loss of 3% or more (3 up, 4 down). The VIX, a measure of volatility, which had been below 15 as recently as April, spiked above 45 for the first time in well over a year.

The market ended the month at 11,613.53 -- its fourth straight losing month. The string of losses has wiped out virtually all of the year's previous gains; the Dow is now within 50 points of where it started the year.

August, Quarter-To-Date, Year-To-Date & Recovery-To-Date Review

Here's where we stand vs. some key dates and milestones:
  • From All-Time High of 14,165 on Oct 9, 2007: the Dow is down 2551 points (18.0%)  
  • From Crash Low of 6547 on March 9, 2009: Up 5067 points (77.4%)
  • From 52-Week Low of 10,269 on September 1, 2010: Up 1344 points (13.1%)
  • From December, 2010 Close of 11,578: The Dow is basically flat -- it's up 36 points (0.3%)
  • From 52-week High of 12,811 on April 29, 2011: the Dow is down 1197 points (9.3%)  
  • From 2nd Quarter Close of 12,414: The Dow is down 801 points (6.5%)
  • From Prior Month Close of 12,143: The Dow is down 530 points (4.4%)
  • From Recent Low of 10,720 on August 10, 2011: Up 893 points (8.3%)
For other recent results, see July stock market results and September 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 75% since then and still be below the all-time high, see The Importance of Avoiding Large Losses.

Record Low Treasury Yields

Fear sparked not only volatility, but a flight to safety as well. As a result, even in the face of the ratings downgrade, yields on 10-year U.S. Treasuries fell. On August 19, the yield on the 10-year Note closed at 2.07% -- lower than the yields during the Great Depression. According to CNNMOney, intra-day yields hit the lowest levels ever.

The Next 10 Years

Because of elevated valuations, my stock market projection model projected below average 10-year returns in the neighborhood of 5.5% as of the beginning of the year. The roughly flat market performance since then has increased the prospects ever so slightly, but the less than 6% expected returns are still well below the average returns the market has historically delivered.

Related Articles & Posts

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.
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.
For lists of other popular posts and an index of stock market posts, by subject area, see the sidebar to the left or the menu bar at the top.
Copyright © 2011 . Last modified: 10/1/2011

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1 comment:

  1. On August 8th, the VIX spiked to 48, with the S&P500 at 1150. This indicates that we should see S&P500 at 1000, within 12 months. Near term, I would expect to see the 12 month low of 1100 re-tested. We still have a ways to go before this market bottoms


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