Amid the nuttiness of what one commentator is now calling a “Wolf” market – not even a “Bear” market – I thought I’d give you a picture of average returns from US stocks, month-by-month, since 1950. 

As you may recall, this year, stocks seemed to storm out of the gate, stumble in later January, get up off the ground only to fall again, ard, in later April.  Since then, except for July, things have been pretty ugly.  By the way, it is not unusual for the stock market to underperform during the May to October time frame with a brief counter-trend rally occurring in July.

Now most of the ugliness this year may come from geo-political events and disasters (Think of the Deepwater Horizon in the Gulf or the seeming collapse of Europe’s banking and financial system.).  Such events, seen in retrospect, may have been a bit overdone.  But at the time, they appeared to be the beginning of the proverbial “end of the world.”

The chart below, from Chartoftheday, takes all the disasters and tragedies and looks at monthly average returns since 1950.  It makes for interesting stuff.  As we stand on the diving board poised to enter September, the picture is not pretty for that month.

But keep those chins up. And don’t stop investing for retirement.  I may be the world’s last loony, but stocks look to have a lot more value right now that bonds, especially government bonds.

God bless you.

As I mentioned a couple of weeks back, stocks are down but by almost any measure, they are extremely cheap.

“Ah, yes,” some may say, ” “that’s because we’re still in a bubble.”

And to that I would say loudly, “Nah! Not so”

What we’re seeing is a very cheap market threatened by a very dangerous environment. In the eternal investment struggle of risk vs. return, risk is winning right now.

Let me try to explain a bit more. In valuing stocks, something called “earnings yield” helps us know how expensive stocks are. Bonds and CDs pay interest. Earnings yield – or estimated, next year’s earnings from a stock divided by its current market price – is like an approximation of the interest rate a bond or a CD might pay.  So, current estimates of the earnings from the 500 stocks in the S&P 500 over the next 12 months are about $84.  If we divide that by a current S&P stock price average of about 1050, you get about 8.2%

Stocks, over long periods of time, offer more return than bonds and CDs, so the earnings yield stocks would have to pay a would-be investor should not be as high as the interest paid by a bond. But in whacky times like today, stocks are offering much higher earnings yields than the interest on bonds.

To get specific, 10-year US Treasury bonds are paying about 3.25% a year, while the earnings yield on an average S&P500 stock is currently about 8.2% - or over 250% higher than the interest paid on the Treasury Bond.

Rationally, this should not be and should lead lots of investors to take money out from under their mattresses to buy stocks. So what’s up? Why are people selling stocks, instead?

Because of perceived risk. Big time!

In other words, in a such a risky world, stocks may not be such a screaming buy, after all; certainly not if, say, Europe is on the verge of financial collapse.

The stock market may simply be placing an extremely high-risk premium on the outlook for stocks’ earnings. This may not be unreasonable, either,  given all the uncertainties in global financial conditions.

There is a deep concern reflected in stock prices over the prospect of another credit crisis.

Credit is the lifeblood of capitalism, and a disruption to credit flows can devastate economies and earnings very quickly.

This was clearly evident in the 2008-2009 market sell-off. The credit crisis in the U.S. banking system caused a deep recession with earnings plunging to zero in the fourth quarter of 2008.

Today, again, investors are very scared.  And U.S. stocks are pricing in a very high risk premium due to potential credit problems, as most clearly evidenced by the problems in Greece and Southern Europe. If credit freezes up in Europe and financial institutions face write-offs, there is a risk that U.S. companies again face serious earnings declines.

That high risk premium also reflects, but to a much smaller degree, concerns about the economic recovery in the United States.

Before the blow-up of the Greece problems, the U.S. stock market was inching steadily higher. At least based on economic and earnings forecasts.  This seemed justified, too.

The current (strong) consensus is that the U.S. economic recovery will continue in 2010 and 2011. Growth may be below what typically occurs in a recovery, but even 2% economic growth would be sufficient to produce moderate earnings growth in the quarters ahead. As noted above, stocks are very cheap based on current earnings, and even cheaper with any degree of earnings growth through 2010 and into 2011.

But there are risks to the U.S. economic outlook, particularly since commercial and industrial loans at U.S. banks continue to decline at a disturbing rate. The U.S. economy cannot rely on monetary growth from Federal government forever. Private credit flows from banks and people and businesses seeking loans needs to pick up.

Yet, given time, U.S. credit and economic conditions will probably (NOTE: “probably” – I cannot see into the future) stabilize - barring a significant shock. Such would lead to decent earnings growth causing stocks to rise.

And stocks could rise a lot, because they are cheap. But it’s also true that risk is now hammering the stock market.

If Europe and the U.S. manage to muddle through the current fiscal stresses, even if that takes a few years, we’re in an historic long-term buying opportunity.

But it is indeed possible that getting developed nations out of their mountains of debt will take years and cause serious economic disruptions. This possibility makes for a far higher-than-normal chance for a sharp stock market decline.

This high risk/high reward situation requires that investors – you and me - honestly think through our tolerance for risk and assess our long-term plans. For young people, this may well be an outstanding buying opportunity. In fact, further declines in the market may improve long-term returns if investors keep buying (more cheaply) into the market through 401(k) and 403(b) programs, assuming economies and markets stabilize over time.

For others of us with a shorter time horizon, the risks may warrant caution, evidenced by reducing our exposure to risky assets like stocks. There is no doubt that we have world-wide financial and debt problems that could pose potentially-serious consequences.

Stocks are cheap, yes. But risk is also high.

Is the stock market getting ahead of economic reality?  Is it about to roll over and die?

I doubt it, which might be good news to retirement savers who use the stock market, or stock mutual funds, to fund their retirement savings plans.

After the 57% loss that was experienced by the U.S. stock market from Oct. 2007 to March of 2009, it’s not unusual for many people to remain skeptical of investing in stocks or of even going back into the market.

However, such skepticism fuels market rallies.

Look at the Chartoftheday below.

It illustrates beautifully, I think, several rallies that have followed massive bear markets. By the way, a ‘massive’ bear market is a decline of more than 50%.  Such swoons are not common.

Since the inception of the Dow Jones Industrial Average in 1896, there have been only three bear markets wherein that index of stock values declined more than 50%. (They occurred in the early 1930s, the late 1930s into the early 1940s, and then much later, during the very recent financial crisis). The chart below happens to add in the rally in the NASDAQ that followed the dot-com bust of 2000 to 2002, when that index drooped a whopping 78%.

It may interest any reader that the current Dow rally has followed a path that is fairly similar to that of the NASDAQ rally that began in late 2002. It may also be worth noting that each of the rallies that followed the BIG market busts lasted from about 300 to 370 trading days before morphing into a trading range, or a choppy phase, that lasted another year or more. Right now, we’re closing in on Day 300 since the current rally commenced.

History tells us that the rally could run a while. For big rallies following BIG market declines are not unusual and are not quick to end, either.

So, if you’re “in,” take some encouragement from this news. And if you’re “out,” maybe you should think of putting “your toe back in the water.” For while I can’t foresee the future, I can share results of what’s happened in the past after similar catastrophic market falls.

Blessings to you all.

Yes, sir-ee!

It’s that time of the year again.  As Andy Williams crooned it, “It’s the most wonderful time of the year…”

But no! wait!

He was singing about Christmas, right? not April 15th.  Tax time’s coming next.  Not Christmas.  Christmas is still a ways off.

Ah! tax time.  In honor of which then, let me serve up a couple of nuggets of wisdom from Henry Hazlitt (1894-1993), the late writer of so many interesting things economic for The Wall St. Journal.

Hazlitt Nugget #1:  “When people who earn more than the average have their ‘surplus,’ or the greater part of it, seized from them in taxes; and when people who earn less than the average have the deficiency, or the greater part of it, turned over to them in hand outs and doles, the production of all must sharply decline. For the energetic, and able, lose their incentive to produce more than the average; and, the slothful and unskilled lose their incentive to improve their condition.”

Nugget #2: “The art of economics consists in looking, not at the immediate but of the longer-term effects of any act or policy; it consists of tracing the consequences of that policy, not merely for one group but for all groups.”

As you prepare your return, pay what’s due, or get a refund, just remember: We’re a people living on borrowed time, whose government is spending BIG TIME!  Trouble is up ahead on this highway.

Speaking of which (or thinking about Christmas), I feel a little like that third ghost that Ebenezer Scrooge meets.  Remember him? The one of “Christmas-yet-to-be,” who scares Scrooge into seeing what’s ahead, if he (or we) don’t change our ways.  In short, we’re a people that doesn’t so much have a tax shortfall problem; we have a government spending problem.  We are living like a nice, if quarrelsome, family, on the verge of bankruptcy, yet completely unable to stop ourselves from charging still more on our credit cards.

Because it will only help people!  And because it’s the right thing to do.

If you don’t believe that trouble is coming, consider two, itty-bitty factoids that broke, with no particular fanfare, last week.

Factoid #1:  Warren Buffetts’s company, Berkshire Hathaway, issued some bonds.  Astoundingly, Buffet’s bonds - bonds of a publicly-traded US company - carried a lower interest rate than US Government bonds with the same maturity issued last week.  Yikes!!!

Factoid #2: The US Social Security Administration announced for the first time in its 75-year history that it paid out more money than it took in.  First time ever.  Seventy-five years.  This historic -  and very dangerous moment  - was not supposed to occur until 2017, according to the independent Congressional Budget Office, the same people who, by he way, recently told us that the new health care reform act will SAVE (yes, SAVE!) the US government $138 billion in its first 10 years and a trillion dollars in the second.

But then again, maybe we have no need to worry, for the so-called rich (whose top 1%, you may know, already pays about 30% of all taxes and whose top 5% pays about 50%) can be counted on to pay still MORE!  Much more, in fact - because they don’t, still, pay their “fair share.”

But pray tell, what is their “fair” share?  (If you don’t know, reread Hazlitt Nugget #1)

Happy tax time, everyone. If you don’t have a refund - I mean increase - coming this year, just wait, you will.

Being a person of faith does not mean I do not trust in a loving, caring God.  But nor does it mean that I am not troubled by the doing of my fellow mortals in this world and this land who seem oblivious to the consequences of their actions.

Blessings to you all.  And pray about this mess, too.

How are home prices doing in America?  After having falled for a couple of years?

Well, better.

Below, I have appended a chartoftheday that shows, rather dramatically, how much the US median price of a single-family home has changed over the past 40 years. Look at the chart for yourself, but make sure you note the rapid price rise that occurred nationwide from 1991 to 2005.

However, since 2005, it’s been a whole different story: the asset that was not supposed to ever fall in value plummeted 35%.

So, if you happened to buy a house in 2005, wowie!, you have been hurt badly; at least, so far. In fact, even the older-homeowner who’s had his or her house since, say, 1979, has actually lost money (about 4.3%).

This reality does not paint a very pretty picture over the past three decades. But maybe it’s worth noting that the median-priced, average home in American home has at least moved back to the top of a trading range that it lived in from the late 1970s into the mid-1990s.

So much for real estate being the greatest investment ever.

As I try to tell my friends and readers:  from decade to decade, no one can tell what asset will do best; hence, hold a diversified portfolio of many different assets.  For sure, owning a house has many benefits, but it’s not likely the greatest of great piggy banks that you’ll crack into at retirement.