Notes, Views, and the Occasional Provocation July / August 2009  

The old advice to "sell in May and go away" has certainly not worked well this summer. July was the best month for the Dow Jones Industrial Average in twenty years, and the rally that began last March has continued into August. Within a matter of weeks, the fear of losing everything has been transformed into the fear of losing out.

But is the rally real, and can it last? We address these questions below.

Apart from the markets, I hope your summer has been going well and that in everywhere but San Francisco, you are staying cool.

Warm regards,

Milo Benningfield

Is It Real, Can It Last?
After the explosive stock-market rally of the past few months, investors face the same vexing questions as infatuated lovers. more

From the BFA Blog
Several highlights from our blog at more

BFA Media Quotes
Recent media quotes. more

Is It Real, Can It Last?
By the end of July, a remarkable rally that began after March 9th pushed all major equity prices into positive territory for the year to date. Large U.S. stocks were up almost 11%, large foreign stocks over 18%, and emerging-market stocks almost 52%. Even more impressive are the returns of the rally itself, which has happened over a matter of weeks:

Equity Asset Class Returns – March Through July 20091

Now that the rally has continued into August, investors are faced with the perennial questions of infatuated lovers: Is it real? And can it last?

The rally is real enough. Investors opening their July account statements can see the dollars on the page. In fact, given the context of the recession and last year's market crash, the rally itself is not that surprising. Since WWII, the median advance of the S&P 500 Index began 4.6 months before the end of a recession and gained, on average, over 26%. Thus, the main question before the rally was not if, but when it would arrive.

Nor is the magnitude of the rally that incredible. Extreme market drops have historically been followed by an opposite reaction that, if not equal, has typically done much to repair damaged portfolios. Lest we forget, 2008 was not merely one for the record books; it marked one of the three worst crashes of all time for the modern U.S. stock market:

Worst U.S. Stock Market Declines – 1926-2008 (Inflation Adjusted)2

The second question – can the rally last? – is more difficult. The cynics certainly have some strong points: national unemployment appears headed to 10%, credit flows are anemic, banks continue to fail, housing foreclosures continue apace.

But bad news alone has not been enough to derail this rally so far. Bleak economic news, in fact, is all it's ever known. The rally arose from nowhere during the dark hours of 2009's first quarter, when U.S. gross domestic product dropped 6.4%, its worst decline in 30 years. The quarter after that GDP dropped again at a pace of 1%.

The headlines, too, have been depressing. From March through July, while stock prices rocketed up, major banks cut dividends as much as 85%; Warren Buffett's Berkshire Hathaway lost its longstanding AAA credit rating from Moody's; Chrysler and GM filed for bankruptcy; California began issuing IOU's in lieu of tax refunds. To add insult to injury, the World Health Organization upgraded the swine flu pandemic to a level-five alert.3

Nor will bad news alone determine where stock prices go next. This is because markets move not simply in response to what news comes next, but in response to what comes next relative to what was expected. As an example, a company’s earnings can fall, but if they fall less than expected, its stock price can surge.

This is a key point forgotten by many investors attempting to time their stock purchases and sells by trying to decipher current news reports or data streaming across their screens.

It's also worth noting that expert consensus failed wildly to predict last year's market crash, the largest in a generation. The experts also missed this year's explosive growth in equity prices. So we can't rely upon experts to guide our guesses about the future.

That said, a consensus has been forming the past several weeks around what PIMCO's famed manager Bill Gross is calling "the new normal." In this new world, we will have below-average economic growth, stagnant job creation, and, surprisingly, given the concerns about hyperinflation just a few months ago, low inflation.

Perhaps. But what specifically this will mean for stocks is anybody's guess; even Mr. Gross can't tell us that.

Ultimately, our attempt to answer how long the market may rally is a forecast. An answer would surely be satisfying, intellectually and emotionally. But our forecast would still be, at bottom, a guess. And attempting to base our entire investment strategy upon it would be perilous. As history teaches, investors who try to employ such forecasts are just as likely to tilt the odds against themselves as in their favor.

Long-term investors are much better off heeding Woody Allen's dictum that eighty percent of success in life is achieved merely by showing up. It's a pretty simple strategy. But, as many investors have learned – again, I'm afraid – not so easy to deploy.

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From the BFA Blog
You can access our blog at or by going directly to the home page of our website at You can also click on the links below to go directly to recommended posts.

What The Sardines Can Teach Us
Markets fall and rise in natural cycles, and it pays for investors to attune their expectations accordingly.

Stock Holding Periods Growing Shorter
Whatever happened to stocks for the long run? And can literature offer any clue to market cycles?

Conspiracies Against the Laity
The state of financial advice in America resembles the haphazard efforts of nineteenth century medicine.

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BFA Media Quotes

Recent Media Quotes, August 11, 2009

Milo was quoted in Marilyn Kennedy Melia's article, "Dividend Reinvesting to Boost Returns," which addresses reinvestment strategies. "Dividend reinvestment dovetails with an investing maxim called "dollar cost averaging," which holds that investors do well to consistently invest small amounts of money, says San Francisco financial adviser Milo Benningfield." Milo also noted that investors could use the strategy selectively: "It really depends on how complex you get with your investments," says Benningfield. "If you really don't like a holding anymore and you plan to sell it, you may not want to reinvest. Or you might want some dividends in cash so you'll have money to invest when opportunities arise." Read the article.

BusinessWeek, July 27, 2009
Milo was quoted in Aaron Pressman's article, "How to Play It – Investing In Startups," which discusses the mechanics and desirability of investing in a business startup. Milo noted the risk involved: "Milo Benningfield, a San Francisco adviser, says private startups are like baby sea turtles that must rush across the beach past predators to survive. 'If a good tech idea can even hatch, it has merely won the right to try to cross the sand and then faces even greater threats in open water,' he says.” Read the article.

That's it for now. Thank you for reading. Please look for our next newsletter in October.

Best Regards,

Milo Benningfield

1 All index data calculated from returns from 3/1/2009 to 7/31/2009; asset-class performance based on the following indices: U.S Large Cap Value on the Russell 1000 Index; U.S. Small Cap on the Russell 2000 Index; U.S. Small Cap Value on Russell 2000 Value Index; International Large Companies on MSCI EAFE Index (gross div); Emerging Markets on MSCI Emerging Markets Index (gross div).

2 Ten lowest annual returns calculated based on the S&P 500 Index 1926-2008 (inflation adjusted).

3 "Climbing the Wall of Worry," Weston Wellington blog at Dimensional Fund Advisors, August 3, 2009.

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