After seeing the stock market lose more than half its value, the recent rally has brought welcome relief to battered investors. But as stocks continue to plow higher, the question on everyone's mind is whether they'll continue to rise -- or whether smart investors are starting to tiptoe toward the exits before a next wave down.
Of course, how you answer that question depends on a lot on your view of not just the stock market but the overall economy as well. If you believe that the economy has bottomed and that things will only get better from here, then the gains we've seen so far could be just the beginning of the next bull market. On the other hand, many believe that plenty of bad news is yet to come -- and that the stage has been set for the biggest sucker's rally since 1930.
The Great Depression's post-crash rally
For some perspective, take a look at the situation right after the 1929 stock market crash:
- From early September 1929 to mid-November, the Dow lost almost 50% of its value.
- Then, though, the market rebounded over the next five months until mid-April 1930, as the Dow jumped over 50% and recovered more than half of its previous losses.
- Only then did the worst of the fall begin, as the Dow plunged an astounding 85% before bottoming in 1932.
Now compare that to the situation we've faced lately:
- From late 2007 to March 2009, the S&P lost about 58% of its value.
- Since the March lows, though, the market has rebounded, and the S&P has jumped 47% and recovered about a third of its losses.
So what comes next? If you believe that the Great Depression serves as a reasonable model for what's going on today, then two things pop out. First, the 1930 sucker's rally lasted about five months -- only a few weeks longer than the current rally has run. Second, the current rally has roughly matched the Dow's 50% bounce in 1930, although for the S&P to recover half of its losses since late 2007, it would have to jump to around 1,120, about 15% higher than its current level.
Of course, there are plenty of other models that would lead you to different conclusions. After the 1987 crash, for instance, stocks recovered quickly and kept on moving to new highs in relatively short order. During the 1970s, on the other hand, a substantial recovery for stocks hit a ceiling, and markets traded roughly sideways for much of the rest of the decade.
OK, but what should I do now?
History can't tell you whether stocks will rise or fall tomorrow, but it can give you some good long-term basic rules to follow.
Perhaps the most important lesson is that even in the worst economic downturns, some companies survive and later thrive. While it's difficult to track back long-term returns over 80 years, look at how these Depression-era survivors have done in recent decades:
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Stock
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Stock Data Available
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Average Annual Return
|
|
Ford Motor (NYSE: F )
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30 years
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8.9%
|
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General Electric (NYSE: GE )
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45 years
|
9.4%
|
|
JPMorgan Chase (NYSE: JPM )
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25 years
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10.7%
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|
Procter & Gamble (NYSE: PG )
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35 years
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11.8%
|
|
General Mills (NYSE: GIS )
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25 years
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15.2%
|
|
PepsiCo (NYSE: PEP )
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30 years
|
16.0%
|
|
Coca-Cola (NYSE: KO )
|
45 years
|
9.4%
|
Source: Yahoo! Finance.
It's easy to get caught up in markets rising and falling. Obviously, many stocks will track the overall market, and as we've seen over the past two years, it's tough for even the best companies to see good stock performance when the market is plummeting.
But remember: Market barometers like the Dow and S&P 500 are only averages. They're important for index fund investors, but if you've singled out individual stocks to invest in for the long haul, don't let the overall market's direction sway you too much. It’s far more important to focus on the particular business conditions that your companies face and whether they can meet their own unique challenges to keep producing profits for shareholders.
Don't get suckered
I don't know whether this is a sucker's rally or not. But the best way to get suckered is to let the current uncertainty lure you into abandoning your long-term investing plan. Although stocks will inevitably drop again at some point in the future, the best rewards come from promising companies that will survive no matter what happens.
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