Observations: May 2011 Stock Market Update

Wednesday, June 1, 2011

May 2011 Stock Market Update

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

The month started off with a bang -- literally. On the evening of May 1, POTUS (as the White House Twitter account refers to him) announced that Osama bin Laden had been shot and killed. The relief rally was short-lived, and was soon overshadowed by the bursting of the bubble in commodities. Silver dropped more than 25%, down from its highest levels since the Hunts tried to corner the silver market back in the 80's. Other commodities suffered as well, though not quite as much.

By mid-month, U.S. debt had reached its $14.924 Trillion limit, and some congressmen were threatening not to support raising the debt limit without major spending cuts. This raised the possibility, admittedly slight, that the U.S. could actually default on its debt. Sovereign debt issues continued in Europe as well, with the restructuring of Greek debt appearing more and more to be a question of when, not if.

The above, plus the approaching end of quantitative easing weighed on the market. However, there is still lots of bullish sentiment. So, the result was an up and down month, with the DJIA (Dow Jones Industrial Average) ending the month at 12,569.79.

Here's where we stand after this remarkable 2-year+ bull market:

From Prior Month Close of 12,810: The Dow is down 241 points (1.9%)
From 1st Quarter Close of 12,320: The Dow is up 250 points (2.0%)
From December, 2010 Close of 11,578: The Dow is up 992 points (8.6%)
From Recent Low of 9986 on August 26, 2010: Up 2584 points (25.9%)
From 52-Week Low of 9686 on July 2, 2010: Up 2883 points (29.38%)
From Crash Low of 6547 on March 9, 2009: Up 6023 points (92.0%)!

Note: For other recent results, see April stock market results or June stock market results

Next Steps??

Even with this month's drop, we're still close to having recovered all the way back to the all-time high.

From All-Time High of 14,164 on Oct 9, 2007: the Dow is down 1595 points (11.3%)

However, given the role that QE2 seems to have played in the advance since this past September, it won't be surprising if the market gets a case of nerves as it contemplates what happens when quantitative easing ends at the end of June.

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 over 90% and still be 10% below the all-time high, see The Importance of Avoiding Large Losses.

The Next 10 Years

A key question in is whether this advance is sustainable; will it be enduring -- or only temporary? My stock market projection model projected 10-year returns in the neighborhood of 5.4% as of the beginning of the year. Above-trend performance during the first quarter reduced future prospects further to around 4.7%.

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: 7/4/2011