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Are We There Yet?

Mohammed El-Arian, the Co-CIO of PIMCO Funds, often makes the analogy that investing in the post-Lehman world is like riding in car over a bumpy road to an unknown destination. After rebounding in 2009, stocks have posted healthy gains but have now hit another period of volatility and decline. Investors are like passengers in the back of that car who want to know, “Are we there yet?”. Unfortunately, driving the car are policy makers in the U.S. and Europe, who often seem to be arguing about which direction to turn.

We don’t know when we will get through this recent market correction, but we do know that it often seems the darkest before the dawn. Consider these stock market tendencies from a recent Schwab update:

1) Stock market returns are better when investor confidence is lowest:
Between 1995-2011, when the NDR Crowd Sentiment Poll (Investor Confidence) has been greater than 62, annualized returns have been -0.2%. When the poll has been below 62 (currently below 50), annualized S&P 500 returns have been 8.8%.

2) Higher levels of fear and volatility often mean higher returns later:
Between 1996-2011, when the VIX (Volatility/Fear Gauge) has been greater than 28.5 (currently 37), annualized S&P 500 returns have been 33.9%. When they have been below 21.5, annualized returns have been -3.6%.

3) Stock market returns are better after consumer confidence is lowest:
Between 1969-2011, when the Conference Board Consumer Confidence Index has been below 66 (currently 44.5), annualized Dow Jones Industrial gains have been 14.4%. When the Consumer Confidence Index has been above 110, annualized Dow Jones Industrial returns have been -0.2%.

So this we do know, things will get better, and investing when things seem gloomiest often pays off in the long run. We just want to make sure things do not get any darker first.

Please call us with any questions or concerns. Feel free to forward this to others who might be interested.

Have a great day!

Bob and the All Star Team

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