“Pigs Get Fat. Hogs get Slaughtered.”
-Folk Saying
“Every dog has its day.”
-Idiom
Yesterday the Dow Jones Industrial Average soared more than 490 points. This 4.2% gain was the strongest since March 23, 2009 which marked the bottom of the market downturn that began six months earlier. Financial stocks within the Standard and Poor’s Index climbed 6.9% and French stocks rose 4.2%. All of this good news has been widely credited to the Federal Reserve’s moves to make it less costly for European banks to borrow U.S. dollars. Today the stock market was essentially flat on news from Europe that Spanish debt instruments might have their credit ratings downgraded. The Dow had been down 6% for November but this rally meant that the month closed up .8% and that the Dow is now positive by 4.04% for the eleven months of 2011.
But what does this strong rally really mean to you? Can you take this as the first of many positive days and as the start of a steady recovery in the stock market? Or does this good news send a different message?
If there is a single lesson for American investors in this sharp market gain, it’s that no matter how bad the economy gets, no matter how poorly stocks and/or bonds are performing, a balanced portfolio that gives you exposure to a broad array of investments is the best kind of portfolio to hold continuously. Individual investors can become discouraged and even embittered by the kind of persistent, depressed market that we’ve experienced since the fourth quarter of 2008. There have been periods of good gain like the last six months of 2010 but it’s felt more like a protracted stretch of flat or negative returns with very high levels of volatility to boot. It might have seemed silly and pointless to hold U.S. and foreign stocks during these bleak stretches but there’s no telling when stocks can once again begin to turn in attractive returns. During the technology bubble of the late nineties and the real estate and credit bubble that led to our current mess, the idea of holding bonds when stocks were turning in double digit returns seemed crazy. The reason that smart investors continue to hold a balanced portfolio is all those assets, at one time or another, produce good returns. We can’t predict their future and we can’t predict when they will rise or fall.
European leaders are scheduled to meet again next week and many would prefer that the German-French team of Merkel and Sarkozy can prevail in encouraging Euro nation to subscribe to austerity measures that would require greater prudence and fiscal responsibility going forward. We’ll see. Stayed tuned and stay broadly invested.
