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Harvey's Investment Review 10.5 H ISSUE 11.1 Harvey’s Investment Review March 2011 First QUARTER The seismic energy released by the recent 4. Black Monday October 19, 1987 saw a 2011 STATISTICS Japanese earthquake was almost 100 times more vertiginous 22.61% drop of the DJIA, and investors powerful than last year’s Haiti earthquake. lost more than $500 billion during the largest one- “Stock market earthquakes” since 1929 have day market plunge in history. Economists still Gross Domestic Product followed a similar pattern. Some are earth- disagree about the specific causes of this historic (GDP) shaking and others just appear catastrophic but event, but most experts do agree that the root rd causes were stock overvaluation, programmed 3 Qtr 2010 +2.6% recover rapidly. Whatever the difference in trading and the psychology of pure panic. 4th Qtr 2010 +3.1% impact, they all have one thing in common: The stock market has always recovered. 5. The Mini-Crash of October, 1997, caused by an economic crisis in Asia, started with a 6% overnight Consumer Price Index Let’s examine two seismic market events that, at first, seemed devastating, but turned out to be drop in the Hong Kong Hang Seng Index and (CPI) / Core relatively moderate. spread to markets around the world. The DJIA Jan: +0.5% recorded its 7th largest one-day drop in its 114-year Following the 9/11 attacks on the World Trade history, and trading on the New York Stock Feb: +0.5% Towers, the stock market closed for 4 days. When Exchange closed early at 3:35PM. the market reopened the following Monday, the Oil (light crude) plunge of all stock averages felt endless. But it 6. The dot.com Bubble of 2000-02 was an Mar 31: $106.72 bbl wasn’t. During the week of September 16, the implosion of stock market values following an 8 year run-up of internet-related stock prices. The crash Dow Jones Industrial Average (DJIA) dropped began on March 10, 2000 when the tech-heavy 3-Month T-bill: 0.09% 14.3%, and shed $1.4 trillion of market value. Then, the market reversed direction on September NASDAQ Index dropped 9% in just 6 days. During 10-year T-bond: 3.47% 27, began to rise and by November 14 had the three year decline, the NASDAQ plunged from (Mar 31) recovered all losses in only 35 days of trading. over 5,100 to under 1,100 points, almost an 80% decline. The “flash crash” was a tremor that lasted only 15 Gold minutes. On May 6, 2010, the DJIA plunged by 7. The Chinese Correction on February 27, 2007 Feb 28: $1,411.00/oz 1,000 points and recovered in the time it takes for set the stage for the subsequent 3-year Great Mar 31: $1,439.00/oz a coffee break. The incident occurred following Recession. A rumor of an interest rate hike by the the highest computer-trading volume on record. Central Bank of China triggered a 9% drop in the Shanghai Index that led to a 3.29% slide of the Now, let’s look at major “earthquakes’ that lasted $/Euro at 1.4175 DJIA, almost equaling the 3.45% drop of this index for years and could have destroyed the financial Yen/$ at 83.175 following the 9/11 attack. system, but did not: (Mar 31) 8. The Great Recession of 2007-09 began after the 1. The Crash of 1929-1932 was the first phase of bankruptcy of Lehman Brothers in September, 2008 the Great Depression that did not end until the US a massive default of sub-prime loans, the creation of Unemployment down: mobilization for WWII. “Black Thursday” on synthetic financial products and the collapse of Feb: 8.9% October 24, 1929 was the beginning of a market home values. During the week of October 8, 2008, Mar: 8.8% slide that terminated in July, 1932. During this the S&P 500 dropped over 20%. When the smoke period, the DJIA fell 89% to its lowest point in the th cleared after 17 months of market destruction, the 20 century and did not return to its pre-crash DJIA had dropped by 54%. A governor of the Bank level of 1929 until November, 1954. **Sources provided on the of England declared, “This is possibly the largest 2. The Recession of 1937-38 was a 13-month Explanation Page. Please note financial crises of its kind in history.” collapse that saw industrial production drop by Despite this gallery of tragic events, the market has that past performance is no over 30%. Unemployment rose from 14.3% to always recovered. An investment of $1 on the day guarantee of future results 19% and personal income fell by over 15%. before the crash in 1929 would have increased in Economists blame cuts in Federal spending, hikes value by about 4,000% as of March, 2011. Most of in income taxes and the tightening of the money us do not have an investment horizon of 81 years supply by the Federal Reserve. but one trend is clear: The market rises as the 3. The 1973-74 Bear Market was one of the worst economy grows. All the successful investor needs Harvey A. Wartosky market downturns in modern history with the DJIA is patience and confidence in the future. dropping by 45%. This financial rout occurred A Financial Representative Best Regards, after the Nixon devaluation of the US dollar and offering advisory services and securities through Lincoln the collapse of the Bretton Woods system that had pegged the US dollar to gold. The American Investment Planning, Inc. economy contracted from a strong +7.2% GDP Tel: 800 251 1995 growth to -2.1% during a two year period. ISSUE 11.1 Harvey’s Investment Review March 2011 S&P 500: is value-weighted index of 500 widely held stocks often used as a proxy for the stock market. The S&P 500 index includes 500 of the largest stocks (in terms of stock market value) in the United States and represents a sample of top companies in leading industries in the U.S. economy. Dow Jones Industrial Average: is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. New York Stock Exchange (NYSE): is the world’s largest stock exchange by market capitalization (with listed companies at $12.25 trillion as of May 2010), located on Wall Street in lower Manhattan, New York City, USA. Gross Domestic Product (GDP): is a measure of output from U.S. factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets. Consumer Price Index (CPI): measures prices of a fixed basket of goods bought by a typical consumer, it is widely used as a cost-of-living benchmark and uses January 1982 as the base year. Oil (light crude): Crude oil is the world’s most actively traded commodity. Oil is considered light if it has a low density and low wax content and may be considered sweet if it contains relatively little sulfur. Light crude oil is more desirable than heavy oil since it produces a higher yield of gasoline. Sweet oil commands a higher price than sour oil because it has fewer environmental problems and requires less refining to meet consumption standards. Treasury bills (T-bills): are short-term securities with maturities of one year or less issued at a discount from face value. Treasury bills are the primary instrument used by the Federal Reserve in its regulation of money supply through open market operations. Sources and ideas for information in this newsletter: The Economist, The Wall Street Journal, The Financial Times, Investor Business Daily, Bloomberg, Market Watch, Reuters, US government web sites, Morningstar, CNBC, James Surowicki, Niall Ferguson, Heather Wagner, BNP, private foundation reports, Peter Bernstein, Goldman Sachs Research and Ned Davis. * Sources of Statistics listed on front page: Statistic Website name URL GDP Bureau of Econ. Analysis http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm CPI US Dept. of Labor http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_ id=CUUR0000SA0&output_view=pct_1mth Oil CNN Money http://money.cnn.com/data/commodities/ T-bill & T-bond Dept. of the US Treasury http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml Gold Kitco Bullion Dealers http://www.kitco.com/ Exchange Rates Yahoo! Finance http://finance.yahoo.com/currency/convert?amt=1&from=USD&to=JPY&submit=Convert Unemployment US Dept. of Labor http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_ id=LNS14000000 Advisory Service and Securities offered through Lincoln Investment Planning, Inc. Associates of The Wartosky Group, LLC are financial representatives of Lincoln Investment Planning, Inc. Lincoln Investment Planning, Inc. is a Registered Investment Advisor, Broker Dealer, Member FINRA/SIPC. The Wartosky Group, LLC and Lincoln Investment are independently owned and each is responsible for its own business. Lincoln Investment supervising office: 218 Glenside Avenue, Wyncote, PA 19095 (800) 242-1421. Harvey A. Wartosky A Financial Representative offering advisory services and securities through Lincoln Investment Planning, Inc. The Wartosky Group, LLC. 84 State Street, Boston, MA 02109 Phone: (800) 251-1995, Fax: (617) 227-1993.
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