The Stock Market Is Rebounding Big Time – Should I Care?

Since mid-March, the S&P 500 is up almost 58% and the Dow Jones Industrial Average is up almost as much. If you opened your retirement savings at the end of the first quarter this year and looked at the numbers with a cringe, it’s likely that if you looked at the numbers right now, you’d feel significantly better.

Why the big rebound? To put it simply, the greater world finally realized that the only thing we had to fear was fear itself. The economy didn’t collapse. Instead, we just find ourselves in the middle of – and perhaps moving towards the later stages of – a rather strong recession.

Naturally, as the economy begins to slowly come out of a recession, the stock market goes gangbusters. Companies are beginning to reawaken and slowly increase production, a radically different picture than the massive cost cutting of the past year. Unemployment is somewhat stable – it might go up a little more, but it’s no longer on the rocket ship that it once was.

In short, we’re getting through this and we see sunlight at the end of the tunnel.

What does this mean for you and me, as small individual investors? Does this mean we should convert all of our investments into stocks and ride the rocket ship?

To put it simply, no, it doesn’t.

Hedging your long-term investments on what you think the stock market (or any investment market) is going to do in the short term is called market timing, and it’s never a good idea.

My philosophy is simple, and it’s one that was taught to me by many, many wise investment writers and investment books: unless you’re a day trader or spend a significant amount of time daily studying the stock market, you’re a long term investor, and long term investors have nothing to gain from trying to time the market.

Simply put, the vagaries and complexities and huge sums dealt with on the stock market each and every day, with so much insider information floating around and individuals playing all kinds of manipulative gains, plus the total uncertainty of day-to-day world events (if you recall, for example, 9/11 was wholly unexpected), makes it a very unsafe place for the typical person trying to save for retirement or for another long term goal. Instead, their reward is to simply look at the stock market as a long term place to put their money for a long term investment with a payoff date more than ten years down the road.

It’s all about your goals and your risk tolerance. It has nothing to do with what’s going on today, tomorrow, or next week.

Don’t let yourself be swayed by huge positive returns in the short term – or huge negative returns in the short term, either. Just stay the course with what you’re doing. If you find that the stress of such swings makes you nervous, redirect your future contributions to something with lower risk, like bonds.

Otherwise, just let things ride. Tomorrow might bring a huge unexpected event that we can’t see coming – or that some CEO is keeping under wraps for now. Given time, the stock market will correct itself from that, but over the short term, it’s basically little more than gambling unless you have the time and resources to devote yourself to truly careful study – or you’re investing with a small sliver of your portfolio that’s there solely to play around with.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...

31 thoughts on “The Stock Market Is Rebounding Big Time – Should I Care?

  1. Dan says:

    My opinion is that we are due for a correction. Simply put…this is NOT the best time to start investing. Also, if you are like most people and have experienced the 25-45% average returns on your portfolio, you might want to reconsider capturing those gains.

    If you moved from stocks to bonds right now, you’d lock in your gains, and shield yourself from another potential downturn. If you are wrong, and the market does not ‘correct’, you only lose whatever other gains you might have had this year. (isn’t 40% returns in one year enough?!)

    However, if you are right, you prevent yet another massive blow to your savings and retirement.

    Now…all this is said from someone who is VERY LONG (30+ years to go) and is not a certified investor or anything like that.

    I’ve read Ben Grahams book, “the Intelligent Investor”, and have a minor in finance in college. But other than those points, I’m just like “joe average investor” out there. I stick to index funds and a balanced portfolio for long term.

    Anyhow, there’s my two cents.

  2. brad says:

    i say roll the dice. im 21 with 90% stocks. plenty of time to iron out the kinks later.

  3. ‘Fear is what sends us spiraling deeper into recessions’ and ‘People need to spend at a time where they want to save’ is what I was taught in my economics classes. The news stories about everything starting to get better has started to alleviate some concerns and will be great stepping stone to recovery.

  4. Rick says:

    I don’t believe the reason for the rebound is the overcoming of fear. I believe it has everything to do with government intervention in the markets.

    The government and the Fed have greatly devalued the dollar by creating trillions of dollars to inject into the market, all to save the banks. The government has gone into hundreds of billions of dollars in debt to pay for various stimulus plans. The stock market rebound has nothing to do with fear, or the lack of it, and everything to do with these massive amounts of new money floating through the system.

    Now you may argue that this is a good thing. Government stimulus works! Keynesian economics for the win! Unfortunately, the biggest winners are the rich investment bankers and the top 1% of the wealthy in the country. And you and your kids will be paying for it due to a devalued dollar and trillions of dollars in new debt.

    And it’s questionable whether the stimulus actually worked or not. Sure, car sales went back up. But that was all due to the government cash for clunkers program. And I read that since that program ended, GM car sales dropped 47%. Obviously, it just encouraged people to move up their purchases of new cars during the duration of the program.

    Trillions of dollars of Alt-A and negative amortization loans are beginning to reset. Will the banks be able to handle this second wave of the housing burst? My guess is probably not — at least not without even more government intervention.

    I totally believe that we are in for a pretty severe correction. The only two reasons for the rebound is the government stimulus, and the fact that P/E ratios have improved solely because companies have cut costs due to firing millions of employees. There is no improvement to the top line (i.e. total revenue). The only improvement is due to an improving bottom line from massive cost cuts. But a recovery doesn’t happen here. It can only happen with increasing revenues.

    I also doubt bonds are necessarily the way to go. Once the Fed starts increasing interest rates, the bond prices will go down. You’ll be more protected than in stocks, but not as much as you’d think.

  5. Steve says:

    With this being the first serious recession many younger people have experienced, do you think we’ve brought anything away from this or do you think things will fall back into the patterns of past behaviors?

  6. 1) Brad: You can roll the dice with additional safety. But why roll them at all? Beginning a savings program when 21 allows you about 15-25 more years to compound earnings than the average investor.

    2) Trent: I believe you should care. You may not want to trade and you will not try to time the market, but your net worth varies significantly when markets move. Why remain oblivious to that move? Aren’t you curious as to what your investments are worth?

  7. Brent says:

    I only started contributing last November and I don’t expect to always be on the uphill climb.I will continue contributing the same amounts and not move it from the blend of target-date and index funds that I have. I’m 25 and just hoping that investing at a solid pace in a diversified set for many years will do good enough. Don’t be greedy, Don’t be scared, just be.

  8. Joel says:

    The best thing you can do, if you’re starting out, is to blindly start contributing your fixed $100, $200, whatever each month to a low MER index fund. Even if today is the height of the market, or the low point that $100 might rise to $130 if times are good, or drop to $70 if times are bad. Beginners – just start already. It’s not worth sweating over.

    For those of us with a little saved already (like $20k+) timing the market gets a little more interesting. Is it a bad idea? It is, if you’re wrong :)

    My philosophy is that you should carefully set your asset allocation of proportional equities/bonds. When markets get crazy bad and fear has taken over, sell 1/3rd of your bond allocation (or fund) and buy into equities (something broad-based so you don’t miss the uptick). When media screams more murder and market drops more (the cliff), sell another third of the bonds to add more equity risk. Finally, when the rebound starts again and the craziness is starting to subside, sell the last third and ride it until you’re back to where you started.

    When the market is high again, simply reset to the original asset allocation. It’s tough to know when the market is soaring TOO high… but you can usually gauge when panic has taken over.

  9. Eden says:

    As others have said and provided supporting evidence for, I believe we are in for a MAJOR correction. The lows of last year will be broken.

    There is no indication that anything has improved in our economy or the world economy. The best place to look for supporting information is real time data. Take a look at collected State income and sales taxes. This represents what people made and spent in the previous month. To put it bluntly these numbers are horrific and keep getting worse.

    If stock prices were reflecting this, I would say to keep buying, but instead stock prices have been bid up to insane levels through various fraudulent and deceptive means. I mean those words exactly and there is plenty of evidence of both staring us in the face. After a typical recession, the P/E of the S&P 500 is close to 12. As of September 2009, the P/E of the S&P 500 was above 120!

    We are not living through a normal recession or even ordinary times. For an example of what extraordinary can mean, look at Japan. A Japanese index investor could have bought near the bottom of their fall from the peak 20 years ago (20!!!) and still be underwater in that investment.

    If you are planning to retire in the next 20-30 years, you need to seriously look at the cold hard facts and numbers, not platitudes that work during a 30 year artificial bull market (1980ish to 2010ish).

    For the critics of comparing the US to Japan, I submit that we are in fact in a different situation. Japan at least had exports to allow them to limp along for 20 years. We are following the same game plan (extend and pretend, paper over problems, prop up bad banks, monetize), but don’t have exports to support our government programs. Our deficits are enormous and rapidly approaching the point where we will not be able to realistically afford the interest payments. Think about what that would mean in your personal life (hint: bankruptcy). What does that mean for a government? California is the canary in the coal mine. The rest of the country isn’t far behind unless we change course.

    For the record, I pulled all of my 401k investments out of index funds and into short term treasuries this summer.

  10. Johanna says:

    @Eden: You think the US government is going to default on its debt, and you respond to that by putting your life savings into US government debt? Am I missing something?

  11. prodgod says:

    I pulled out of the market several months ago and I think I’ll stay out. I found that I’m not as risk-adverse as I thought.

  12. prodgod says:

    meant to say “averse”

  13. deRuiter says:

    Our government claims the unemployemnt rate is around 10%. The real rate is around 16% with the underemployed who can’t find full time work and those who have run out of unemployment and thus dropped off the charts. Businesses, the few left which have not been shipped off to coutries with low labor costs (think no OSHA, no unions, limited government regulations, low business tax rates, pro business & pro industry climates, tax breaks for new businesses settling in these areas) have fewer people to whom to sell due to the high unemployment. Real indicators for everyday people, like the lagging collection of state income taxes and state sales taxes, the defaults on mortgages, the possible failing of Illinios and California (among the highest taxed states in the union and run by Democrats oddly enough), six applicants for most job openings, all indicate that this “rebound” is temporary. Our government has a plan in mind for us which does not depend upon improving unemployment, a better climate for business & industry, drilling for American oil and natural gas to become energy independent and keeping these good energy related jobs in America, or strengthening the dollar. To get back jobs (only the private sector can add PRODUCTIVE jobs, government jobs do not produce anything of value, they are a drain on workers in the private sector who are the producers of American wealth and who must support these government workers) you cut corporate taxes and ease government regulations, drill in America for oil and natural gas. You do not vote in “cap and tax”, cafe standards, more government regulations, the Kyoto Treaty, raise the minimim, wage when youth unemployment hovers at 50%, discourage high earners with punitive taxes, hire more government workers. You also don’t ruin the best health care delivery system in the world to gain more control for the government. It’s easy to improve the economy IF THE GOVERNMENT WISHES TO DO THAT. I am glad I’m old because for the young to make financial plans based on the economic system of the past is skating on very thin ice.

  14. Daniel says:

    I think the whole key is to recognize that nobody knows what’s going to happen, and it’s important to have the humility to know that you are making decisions under uncertainty.

    Yes, the market got way oversold back in March, but that wasn’t clear until later (and in retrospect), when it became clear that the downturn in the economy was not as serious and as grave as expected.

    That being said, however, whenever the market makes a 50+% move off the bottom, it’s time to trim, especially if you’re fully invested in stocks. And it’s not clear that the coast is clear for the economy next year either.

    Dan
    Casual Kitchen

  15. It’s wise investing when it goes up. But it’s just gambling when we lose money.

    John DeFlumeri Jr

  16. “Be fearful when others are greedy.”

    -WB

  17. Alexandra says:

    I automate as much as I can, which helps avoid the pitfalls of reacting emotionally to swings in the market. I did a risk profile, and I base my portfolio allocations on that risk profile and my age. I automatically have the appropriate amounts switched over to my investment accounts each month. And my account automatically rebalances each month to retain the percentage of bonds and stocks that is appropriate for my risk profile.

    That means that without any effort on my part, I am buying low and selling high each and every month. This takes the “psychology” and fear out of the equation, and makes my buying decisions emotion-less.

  18. Little House says:

    A few months back, my husband decided he wanted to learn about the stock market and invested a small portion of our savings in some companies that were inexpensive at the time, but that he had faith in. He did okay, we were averaging about a 14% return. He cashed one of the companies out when he felt they had ‘peaked’ for the time being and we made a small profit.

    This made him feel confident that he could choose a good stock. He then invested a little bit more of our savings into two companies that he wanted to ‘day trade’, he had been researching a few others and was sure he could make big bucks within a few days.

    Well, he learned the hard way that sometimes, even with all the research and momentum that appears to be behind the company, it doesn’t go as planned. Now we are holding onto a couple of companies’ stocks that are in the red.

    The lesson learned is that the stock market is unpredictable and that sometimes it’s best to stick with what you know and proceed with long term goals. That’s now his new outlook on the stock market.

    -Little House

  19. Claudia says:

    We took most of our IRA monies out of the stock market and that is where it will stay. We both feel better knowing that if we contribute a dollar to our IRA, when all is said and done, we will still at least have that $1 as opposed to 50 cents or perhaps even nothing.

    Stock market money is all pretend — your stock may have gone up 40%, but it is only worth 40% more if you cash it in right there and then.

  20. KC says:

    This is not the time to start investing again…you’ve already missed it, it was March – June. If you aren’t good at timing the market (and who is?) then you should have been putting money in all along (cost averaging). Either way…you’d have gotten some deals. I have some investments that automatically reinvest and even when prices were in the toilet I was happy cause I knew my dividends were buying more stock/index funds at LOW prices.

    I started investing again in March, but it was due to circumstances more than luck/knowledge of he markets. I moved in December and was finally stable enough in March to feel comfortable returning to my regular investing schedule (but a part of me knew that prices were so low I might never see such bargains again…ever). I’ve watched the market closely since then and we’ve had big gains. As far as the stock market is concerned the recession is over – but from here on out it will be a volatile ride. There will be highs and lows. The best advice is to stick with your asset allocation and ride the waves up and down – you are, after all, in this for the long term. In 30 years you won’t even remember this blip in the markets and you’ll be richer for it.

  21. Craig says:

    You should treat it as normal regardless. Especially if you are planning long term, don’t make drastic decisions about whether it goes up or down on a day to day basis.

  22. Dave says:

    Good post, Trent. Money you need in less than 10 or 15 years should be in cash and bonds. Money you don’t need for at least 10 or 15 years can be put at risk in U.S. and international equities and REITs. The closer you get to your goal i.e. retirement, college, etc., move money into bonds and cash. How do I know this? I’ve done this for the past 25 year and, despite last year’s bloodbath, have done well. I’m still on track to retire at age 55 (that is in 6 years). I started investing when the Dow dropped 22% IN ONE DAY in 1987. Everybody ran for the exits (including my normally unflappable father) and, on the advice of a wise financial planner, I begged, borrowed but not quite stole money to buy stocks. The Dow has never touched 1750 again, by the way. Old saying: The best time to plan an acorn to grow an oak tree was 20 years ago. The second best time is now!

  23. Scott C says:

    I’d step back a bit and look at the broader picture. How much of the growth in the last 3 decades came from deficit spending (both personal and private)? How much came from non renewable resource exploitation compared to the implementation of more efficient practices? Long term deficit spending is completely unsustainable and can cost more in the long run than the up front economic gains. More efficient exploitation of non renewable resources is a great economic driver but at current consumption rates those gains are simply unsustainable. When deficit spending is used to funnel economic growth by improving the efficiency and rate of consumption of non renewable resources, it is inevitable that those resources will eventually become scarce. The money put towards research and development in increasing that consumption will be mostly unrecoverable as we are forced to develop new renewable technologies, and any outstanding debt at such times will likely never be paid back. This eventuality is evident in the automotive industry where decades of combustion engine design is being thrown out the door as we make the costly transition to vehicles powered by renewable resources.

    The baseline for real economic growth must be measured in terms of efficiency gains in the management of renewable systems. Although I don’t have numbers, I would suspect that when deficit funded growth is reconciled and non renewable resource exploitation is ignored, the baseline for growth is actually quite low, probably no more than 1%-3% annually and possibly less. All this really means is that in the near future resource exploitation and deficit spending will continue to drive growth higher than that baseline. As resources become scarce the global economy will reconcile to that average baseline growth rate, resulting in more severe economic upsets.

  24. Eden says:

    @#10 Johanna

    My money is in short term treasuries. There is no cash option in my 401k, so that was the safest option available. I did take out 50% of the balance as a cash loan though to reduce my exposure further.

    I don’t believe that the government will default on its debt, but if they don’t do so then they must cut spending across the board, which will further damage the economy.

  25. Steven says:

    @#9 Eden

    What’s makes you think your money will be any good if the US defaults on it’s debt?

    Second, the value of stock is set by the market. It sells for what people will buy and you can only buy at a price people are willing to sell. Whether those prices are inflated or justified lies in the eyes of the beholder. *cough* Housing Prices *cough*

    Fraudulent and deceptive? In a few cases, but not on the whole. The stock market crash is man-made, the credit crunch is man-made. It is the fear and paranoia of the sheeple that caused this loss of untold fortunes, and will help me make mine (kudos to #22 Dave, I pray to be in your situation).

    Lastly, the investing is a gamble. It always was, and will continue to be a gamble. There is no guarantee, not even with Treasury bonds. Most people got comfortable and conditioned to the unrealistic gains year after year (insert housing crisis once again), and assumed it would go on forever, not knowing why or how the system works.

    @#13 deRuiter

    Drilling for a non-renewable resource is to make the US energy independent? And what happens when you run out of oil to drill for? Stuck with the same problem we have now.

    Only the private sector can add productive jobs? Can you tell me what sector caused the dot com crash? The housing collapse? The current financial crisis? How about you open up a history book a read up on what FDR did, or how about the highway/freeway system?

    US health care best in the world? That’s up for debate, but that’s not what I’m going to argue? Do you think we should stop improving our system, just because it’s the best? Do you think that our system is so perfect, that there are no faults to it? Do you think that the millions, if not billions, insurance companies pocket every year could be put to better use? Do we have a high tech and knowledgeable medical system? Yes. Does it benefit you? Only if you have money. For example, $100k is a dent in the wallet for a millionaire, but that same $100k is something that a a family on minimum wage would be paying for generations to come.

  26. Michael says:

    This article is a good example of the dangers of forcing an abstract idea on concrete reality. The abstract idea is that markets always go up over time as long as we believe and trust in them. The reality is that the markets depend on several factors and chief among them over the long term is the actual solvency, profitability and viability of the companies issuing securities and the United States government which regulates and backs them. We haven’t seen that improve for a long time so increasing valuations should be treated suspiciously.

  27. Michael says:

    Excuse me, I misspoke. Profitability of a “market” is also abstract. There is no such real thing as a stock market. It’s an idea and a lot of numbers in a computer.

    What’s real is the amount of money you have to retire. When you sell, you either have $500,000 or $1,000,000. That’s concrete.

  28. People should not have jumped out of the stock market when it took a tumble. As a matter of fact, that would have been a great time to jump in. I just stopped opening up my 401K statements–probably time to start opening them again

  29. AnnJo says:

    The American economy has seemed resilient for so long that people have come to believe it can tolerate any and all assaults. Logic cautions this can’t be true. And the assaults are really piling on.

  30. ljam says:

    Rick is absolutley correct.
    Also, heed the advice of Eden and Dan.
    But Generation Y’s comment is time tested and always true.

    Look out! – Dow 2200 coming to a stock market near you.

  31. Shadox says:

    Just like selling was not a good idea on the way down, buying is not a good idea on the way up.

    Your asset allocation should be independent of market fluctuations and should only be dependent on your risk tolerance. Of course, re-balancing is a good idea in an up market or a down one.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>