Stock Markets may be Getting Ahead of Themselves

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stock markets may be getting ahead of themselves

September 03, 2009 - Alex Carrick

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The turnaround in equity prices has been one of the good news stories for the business community and private citizens alike. The precipitous fall in share values in October of last year and bottoming out in February of this year was a real confidence destroyer. The improvement since then has been one more step on the uneven road to optimism.

Investors may be getting ahead of themselves to a degree, however. The recovery will be slow and plodding in the preliminary stages, at least, and that means through the end of this year and into the early part of next year. Too many people remain unemployed.

It is interesting to consider to what degree the various major indices have recovered versus their overall declines from most recent peak. With respect to August 31 2009 closing prices, the performances have been as follows.

Dow Jones Industrials (30) maxed out in October of 2007 and hit bottom in February of this year. Over the past six months, the DJI has recovered 35.4% of its total drop.

Standard and Poors (500) also declined pretty much steadily from October 2007 to February 2009. On August 31, it had made back 35.1% of its peak-to-trough decline.

NASDAQ fell significantly from October 2007 to this year’s February. Since then, it has recovered 42.6% of that loss. The unique feature about the NASDAQ index, however, is that its most recent peak was still only about 60% of its all-time high in February 2000.

The Toronto Stock Exchange (TSE) has made back 41.6% of its drop from May 2008 to this latest February. The peak for the TSE came later than for the other indices because commodity prices stayed strong into July of last year. The resource sector carries heavy weighting in the TSE.

There is an old joke that stock markets are successful in predicting many times more than the number of shifts that actually do take place in the economy. Nevertheless, the improvement in stock prices at this time is something to be cherished and held onto as encouragement that better times for the overall economy lie not too far ahead.

Stock Exchanges - Performances of Key Indices - August 31, 2009

INDEX	52-WEEK LOW	52-WEEK HIGH	YEAR AGO (AUG 29, 2008)	MONTH AGO (JULY 31, 2009)	Latest Month-end Closing Prices (Aug 31, 2009)
INDEX	52-WEEK LOW	52-WEEK HIGH	YEAR AGO (AUG 29, 2008)	MONTH AGO (JULY 31, 2009)	Latest Month-end Closing Prices (Aug 31, 2009)	52-WEEK LOW	52-WEEK HIGH	YEAR AGO	MONTH AGO
Dow Jones Industrials NYSE (^dji)	6,440	11,831	11,544	9,172	9,496	47.5%	-19.7%	-17.7%	3.5%
S & P 500 NYSE (^gspc)	667	1,303	1,282	987	1,021	53.1%	-21.6%	-20.4%	3.4%
NASDAQ (^ixic)	1,266	2,413	2,368	1,979	2,009	58.7%	-16.7%	-15.2%	1.5%
S & P/TSX Composite TSE (^gsptse)	7,480	13,771	13,771	10,787	10,868	45.3%	-21.1%	-21.1%	0.8%

Sources: New York Stock Exchange (NYSE), Standard and Poor’s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Table: Reed Construction Data – CanaData.

Performances of Key Stock Market Indices Over the Last 12 Months-
August 31, 2009

*Each month’s closing figure versus the August 29, 2008 closing figure for the index.
The Key Stock Market Indices are:
1) New York Stock Exchange – Dow-Jones Industrials (30);
2) New York Stock Exchange – Standard and Poor’s (S & P) (500);
3) National Association of Securities Dealers Automated Quotations – NASDAQ Composite Index;
4) Toronto Stock Exchange – S & P/TSX Composite.

Data sources: New York Stock Exchange (NYSE), Standard and Poor’s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: Reed Construction Data – CanaData.

S & P/TSX Composite
Toronto Stock Exchange