It’s been a very interesting week in the markets. 

On the day that Independent/Republican Scott Brown won the “Kennedy” Senate seat on Tuesday, January 19th, the Dow rose over a hundred points.  Why?  My guess is that investors saw that Brown’s election would derail Healthcare reform in all its present excessive manifestations.  Maybe, too, the markets felt the overly ambitious agenda of the current administration was finally being challenged by the American people.

However, the next day, the market began to struggle.  Two days last week, it fell over 400 points in back-to-back drops.  China’s decision to cut back on credit in order to slow down their own economy was part of the reason for the drop.  But an even bigger reason was the Obama administration’s newly-released plans to curtail and tax banking in new ways.  This came out of no where.  And investment markets HATE! surprises. 

I hope, if any of you follow these development, or have checked in on your retirement funds in the last week, I hope you will not lose heart.  The U.S. stock market had risen almost 70% with hardly a hesitation since last March. Whatever the reason for the current hiccup - whether it is based on valuations or on politics or both - it’s probably healthy for the markets to take a breather.  “Corrections,” usually meaning a drop of about 10%, occur with regularity.  In fact, they help consolidate past progress. Whatever we’re looking at, stay invested.  Keep up your asset allocation.  Stay part of your 401(k) or your 403(b)

Don’t despair.  This, too, shall pass.

Friday of last week, January 15^th, the stock market suffered its worst day so far in 2010.

Is this, then, the beginning of the end or the end of the beginning?

Who knows? For sure, I don’t.  Nor does anyone else, no matter how much they think they know or how certain they seem to be.

I’m going back to the chartoftheday people to help us gain perspective, given that, often, a picture really is worth a thousand words.

So where are we now, after the market has risen some 60+% since last March?

Well, look at the chart below.  See that we are not even at a “normal” market recovery point yet. Below, you will see all the stock market rallies of the last 110 years plotted. Each dot represents a major Dow stock market rally. As you can see, the Dow has begun a major rally 27 times over the past 110 years, or about one every four years. Most of the major rallies (73% of them) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days — highlighted in the chart with a light blue shaded box. As it stands right now, the current Dow rally (noted as a hollow blue dot labeled “you are here”) is still in the low range of a “typical” rally and would currently be classified as both “short” in duration and “below average” in magnitude.

So, should you get out of all your CDs at your local bank?  Hardly.  But be careful, if you can (after all, you have to sleep at night) - not to be so risk averse that you don’t have a chance to participate in what seems like a normal market recovery.  No, markets will not rise without corrections.  But nor am I trying to make you greedy. I’d just like to help us all understand how long-term investing – such as for our retirement savings – really works.  If you stay out of the stock market – the real engine of growth for your assets - until everything seems clear, you will miss out on most, if not all, of the market’s recovery.

As the new year starts there had been great hope for improving employment in America.  The release yesterday of December’s unemployment numbers seemed to dash those hopes.  The U.S. Labor Department reported that nonfarm jobs actually fell 85,000 in December; a small increase had been forecast by some.  BUT!  not insignificantly, November employment was revised upward to show a net gain of 4,000 jobs – the first month in which there were job gains in two years.

For a bigger, longer perspective, chartoftheday.com shows the percentage increase in the number of jobs for every decade back to the 1940s (actually to 1939). What the chart illustrates is that, usually, the number of jobs at the end of a decade has been anywhere from 20% to 38% greater than 10 years prior. At least that has been the case until the decade just passed, during which the number of jobs basically ended where it began. This dismal job growth is particularly significant due to the fact that the US population has grown by 10%. And 10% growth is necessary over a decade just to keep up with demographic changes and population growth.  These realities have powerful negative investment implications, if they are not corrected. 

It’s worrisome that, in spite of a worldwide growth in wealth over the past 10 years, the US job picture seems so sickly.  However, it’s important to bear in mind that the very start of the decade was a time of usual euphoria, and the end a time of considerable gloom.  The decade started with a 4% unemployment rate and the hope that within a couple of decades we’d eliminate the national debt. It ended with a 10% unemployment rate and mountains of national debt as far as the mind can imagine.  In between there were two crushing national/international recessions that saw investment markets wilt. 

The lack of job growth for an entire decade may just be capturing two moments in a snapshot - the good and the bad - that might look much better a few years from now. 

As we enter a new year and, as well, a new decade, it might be interesting to take a look back at how investment performance compared over the last 100 years - or the last 10 decades.  Our friends at Chartoftheday.com have a wonderful graphic to put things in perspective.  As you will quickly see, based on price alone, the decade just ended is the second worst in the last century - exceeded in its awfulness only by the decade during which The Great Depression occured.

However, if dividends paid to stockholders are added in, then the decade just passed, is worse and wins the booby prize for being the all-time loser of the  last 100 years. The decades of the 1930s and the 2000s, though, do share a dubious distinction:  they both ended with the Dow LOWER than it was when the decade began.

Bear in mind, the 2000s began after two decades of marvelous, but excessive, returns, as the chart below also shows.  Those returns surely felt wonderful, if you were invested during them. But like many who party too hard or too long, a bill comes due and must be paid.  Maybe - just maybe - during the last ten years, we were all paying an overdue bill.

Happy New Year.