Permanent Value

Weekly Update: May 3- 7, 2010

Michael La Salle
May 7th, 2010

Stocks Close Down In a Volatile Week

Stocks were down for the second consecutive week as Greece problems continue.  The S&P 500 closed down 6.39% and the Dow Jones Industrial Average was down 5.71% on the week, marking the largest weekly loss since October 2008.  The Greek debt crisis continued to worry investors this week as violent protesters took to the streets of Athens, killing three.  Thursday saw the largest ever intraday points selloff in stock market history as the Dow Jones Industrial Average started with a slight gain, dropped 998.5 points and eventually closed down 347.8 points for the day.

In economic news, construction outlays surprised on the upside for March, as the March figure came in at a 0.2% gain month over month.  Consensus estimates were set at a decline of 0.3%.  The big economic news of the week came Friday as the jobs report came in unexpectedly strong.  Nonfarm payrolls gained 290,000 jobs in April coming in higher than the expected 200,000 jobs.  The unemployment rate jumped this week to 9.9% as a surge of 805,000 joined the labor force, pointing to optimism as discouraged workers are beginning to see hope and are jumping back into to labor force.

In earnings news, upside surprises continue as Atwood Oceanics, Inc. posted earnings of $1.03 per share, coming in higher than analysts’ estimates of 91 cents per share.   The biggest shock of the week came Tuesday as Overstock.com, Inc. posted earnings of 16 cents per share, 328.57% higher than the estimates of a loss of 7 cents per share.

What opportunities are ahead?

The U.S. stock market marked the largest intraday pullback in stock market history Thursday as the Dow Jones Industrial Average fell nearly 1,000 points a little after 2:45 EST.  Within a span of just a few minutes the market gained back over 500 of the points it just lost.

Although this pullback goes down as the largest intraday selloff in history by points, it is less than half the worst closing percentage drop in history.  On October 19, 1987, a day that would come to be called Black Monday, the Dow Jones Industrial Average plummeted 22.6%, which at the time was a 508 point loss.

While the rapid selloff on Thursday was initiated by fears on the Greece situation, it has been suggested that the bulk of the pullback was caused by a technical glitch that was perpetuated by quantitative hedge fund liquidation triggered by technical factors in the market.  When the market falls, these firms’ computers automatically send out massive sell orders to protect against further losses, thus driving prices even lower.

Despite the fact that the selloff on Thursday was more than likely an anomaly, the markets have been more volatile than normal lately.  Volatility is caused by many factors including the state of the overall economy, industry changes, natural disasters, war, and most recently political and economic turmoil worldwide.

While you can never eliminate market volatility, you can take steps to limit your exposure to the volatility.  The best way to combat the negative effects of market movements is to diversify, or spread your money across different asset classes, including stocks, bonds, and cash equivalents.  Within these asset classes, it is also important to diversify even further by investing in different sectors or bond term lengths.

Equally important when dealing with high volatility, is not to panic, and stay invested throughout all market conditions, good or bad.  A study published by University of Wisconsin-La Crosse, shows that the S&P 500 between 1982 and 2001 had an average annual return of 11.8%.  So in dollar terms, a person who invested $10,000 in 1982 would have over $93,000 in 2001, if the money was invested the entire period.  In that same period, if another $10,000 was invested, but missed the best 10 days in the market, it would be worth about $56,000.

Downward volatility can be an extremely disheartening thing to experience as an investor.  But by taking actions to protect yourself against the downside by diversifying and resisting the temptation to jump ship when the storm hits, investors will continue to win over time.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 -6.39% -0.38% 22.43% -5.16%
Dow Jones Industrial Average -5.71% -0.46% 23.43% 0.34%

 

Next Week’s Economic Releases

May 12 – International Trade

May 13 – Jobless Claims

May 14 – Retail Sales, Industrial Production, Consumer Sentiment