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John Prestbo's Indexed Investor
Sept. 14, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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Three dividend ETFs to fight deflation
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Job one for Nokia's new leader: boost the stock
By John Prestbo
NEW YORK (MarketWatch) -- As we move into the fall, everyone is scratching their heads about what the U.S. stock market will do next -- rally, bump along or drop. Let's check our trusty rearview mirror for clues.
The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,584, +39.65, +0.38%) was down 4% for the year through Aug. 31. It turns out that there have been 12 other years in which the Dow had fallen about that much -- 3% to 5%, say -- by the end of August. What happened through the end of those years?
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On average, the market fell. But the drop was small, just 0.41%. More telling is that most of the moves were up. In eight of the 12 years that the market was down as August ended, it rose in the final four months of the year, by an average of 7.3%.
The fattest gain, 21.8%, came in 1998. If we eliminate that year because of the "irrational exuberance" epidemic raging at that time, the average settles to 5.2%. The range was 2.2% in 1923 to 12.3% in 1942. The most recent example was 2005, which fell 2.8% through Aug. 31 and rose 2.3% during the remainder to finish 0.6% lower for the year.
The down years were fewer but bigger, averaging 13.9%. They ranged from a mild 1.1% drop in 1984 to a 31.5% battering in 1930, during the Great Depression.
To me, this historical record suggests the market's next four months will consist of more up-a-little, then down-a-little reactions to mixed economic signals, with the year ending fairly close to flat.
But since flat is higher than where the market has been for much of the summer, there well may be some momentum going into 2011.
The immediate forecast is dicey, however. Historically, September is the Dow's worst-performing month of the year. Since the Dow was created in 1896, it has fallen 1.2% on average each September. The average decline has improved to 0.9% in the years since World War II ended, but that still ranks dead last. (The third week of the month is the weakest, by the way, with an average drop of 0.5% since 1945.)
The final three months of the year have much better track records. Not only are they all positive historically but also they've been better in the recent past. The table below has the details:
These three are not the months with the best performances -- April is the winner since 1945 at 1.93%. But they add up to the best calendar quarter of the year. That is another historical factoid tipping the scales toward an encouraging view of this year's remainder.
The market's bumpy ride this year has been supportive of one old market adage: "Sell in May and go away." Depending on which day in May you withdrew from the market -- May 6, the day the "flash crash" occurred, would not have been the most opportune -- you currently would be down to flat.
Naturally, this got us to wondering how this timeworn maxim has held historically. The answer: fairly well.
We looked at market action from May 15 to Sept. 15 each year and found an average gain of 2.74% since the Dow's inception. That might seem like too sweet to miss, but since 1945 the average advance has been only 0.61%.
/quotes/comstock/10w!i:dji/delayed DJIA 10,584, +39.65, +0.38% DJIA
The adage's implication is that after you take the summer off you get back into the market and stay in until the following spring. We checked out those eight-month spans, too, and found that they were indeed the best times to be in stocks.
From Sept. 15 through the subsequent May 15, the Dow has risen an average of 4.7% since 1896. Even better, since 1945 the average increase is a mesmerizing 7.3%. Of course, some of that rich performance is due to those overly exuberant late-1990s. But taking out the dotcom-driven surge of 1995-1999 reduces the average gain to 6.1%, which is still mighty attractive.
Of course, history never repeats itself exactly, and the market always is more influenced by pressures of the moment -- of which we have more than a few -- than past performance patterns. Even so, the historical breezes seem to be blowing in the right direction for the remainder of this year.
John Prestbo is editor and executive director of Dow Jones Indexes, a joint venture of CME Group, Inc., and Dow Jones & Co., Inc., publisher of MarketWatch. Radhika Uppalapati and Ross Wiedman contributed research to this report.
Add Comment › · Recommend (1) · Post: Alert Email Print More John Prestbo's Indexed Investor Aug. 17, 2010 Three dividend ETFs to fight deflation July 2, 2010 Global stock markets pay heavy toll June 4, 2010 Give developing-world stocks a spin May 6, 2010 The bull market is coming to an end April 25, 2010 ETF invests on opposite side of the Street Explore related topics Dow Jones Industrial Average Comments Screener First Take Job one for Nokia's new leader: boost the stock
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22 min ago11:39 a.m. Sept. 14, 2010 | Comments: 2
Most Popular Most readMost commented U.S. stock futures drift lower after retail sales 'Goldman Conspiracy' helps China beat U.S. U.S. stocks trade lower after German data Why stocks are likely heading higher U.S. retail sales rise 0.4% in August U.S. stock rise puts indexes in the black for 2010 U.S. stocks shave advance as consumer shares hit Don't judge a 'book' by its cover Tea-party contenders put GOP to the test Tuesday Gold futures rise to trade above $1,270 an ounce Reader Response »- Rexx | 4:27 a.m. Today4:27 a.m. Sept. 14, 2010
+6 Votes (7 Up / 1 Down) Find a Broker Partner Center » MarketWatch's Latest Tweets"Yum Brands hikes its quarterly dividend by 19% http://on.mktw.net/dgkZbO" 11:00 a.m. EDT, Sept. 14, 2010 from MarketWatch
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