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Mark Hulbert
Nov. 3, 2010, 12:09 a.m. EDT
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Ho, hum.
Yet another sovereign-debt crisis passes into the history books, and the stock market rallies.
I say this because the last year is not the first time in recent history in which there has been a run on a nation's currency precipitated by a sovereign-debt crisis. Nor is it the first time in which the stock market "” after initially falling "” shrugged off such a crisis and ended up producing a respectable gain.
In fact, by my count, there have been four major sovereign-debt crises over the last two decades:
The so-called "Asian Contagion" that erupted in the summer of 1997 when a government-debt crisis in Thailand led to a run on its currency and then, in turn, on a number of other Asian countries' currencies as well
"¢The Argentinian government debt/currency crisis that began in November/December 2001
"¢The Russian ruble devaluation in August 1998, which led to (among other things) the bankruptcy of Long-Term Capital Management
"¢The Mexican peso devaluation and associated crisis, which began in December 1994
Believe it or not, 12 months after those crises erupted, the U.S. stock market on average was 17% higher.
How is the current stock market doing relative to its performance in the wake of those four prior crises? The accompanying chart tells the story. Even though we're not a full 12 months into the Greek sovereign-debt crisis, the current stock market's behavior is remarkably close to the historical norm.
To be sure, a sample with just four data points in it is hardly robust enough to provide any statistical significance. Nevertheless, I recklessly chose to first produce this chart in early March "” as a contrarian counterweight to those who at the time were drawing gloom-and-doom scenarios because of the currency and debt crises in Greece (as well as at the other PIIGS countries: Portugal, Italy, Ireland and Spain). ( Read my Mar. 1 column.)
And, as luck would have it, the stock market has obliged my recklessness by playing out a script that is not that far off the average script following the four past crises.
The stock market's sanguine response "” not only to the recent Greek crisis, but to the four previous ones as well "” should not be interpreted to mean that the market doesn't care about runs on currencies or the possibility of sovereign bankruptcies. Instead, I see the market's response as a good illustration of the market's impressive ability to focus on the future.
Once a crisis hits the headlines, after all, chances are good that its economic and financial impact has already been baked into stock prices. To be sure, the public inevitably reacts to those headlines by selling "” at just the point the stock market has moved on to focus on the months and years down the road.
Investing immediately after a crisis hits the headlines is often not a bad idea, in other words. To quote Nathan Rothschild's famous phrase: The time to buy is when the blood is running in the streets.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
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- johnc19 | 2:58 a.m. Today2:58 a.m. Nov. 3, 2010
"Mark Hulbert: A retrospective on the Greek debt crisis http://on.mktw.net/b0jriR" 11:27 p.m. EDT, Nov. 2, 2010 from MktwHulbert
"Mark Hulbert: November by the numbers http://on.mktw.net/9Ek3Rx" 11:07 p.m. EDT, Nov. 1, 2010 from MktwHulbert
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