Italian Debt Crisis + US Debt Ceiling: Now What for Stocks?
Posted July 14, 2011on:
If the recent headlines make you feel like the international financial order is heading toward a cliff, I would not blame you. Apparently, the Europeans have managed to spread their sovereign debt crisis from Greece to Italy, a far more significant country for the world economy. Here in the US, politicians are engaged in high-stakes political brinksmanship regarding raising the debt ceiling, without which the US will go into default for the first time in its history.
No wonder I am getting calls left and right asking whether we should pull out of stocks. Not so fast. Let’s examine what happened over the last year and maybe we can learn some lessons. Let’s look at the headlines about this time last year:
“Europe Crisis Deepens as Chaos Grips Greece” – WSJ, May 6, 2010
“Fearful Investors Are Pulling Out” –USA Today, May 20, 2010
“Housing Prices Remain Weak” – WSJ, May 26, 2010
“Fear Returns – How to Avoid a Double-Dip Recession” – Economist, May 29, 2010
“Spill Tops Valdez Disaster – Deep Trouble” – WSJ, May 28, 2010
“Discouraging Job Growth Batters Stocks” – Los Angles Times, June 5, 2010
“Economic Outlook Darkens” – WSJ, June 2, 2010
“Bond Fund Managers See Signs of a Bubble” – WSJ, June 8, 2010
Since then, the market has rallied. The one-year returns of various indexes and funds are listed below:
|Index or Fund||One-Year Return|
|DFFVX (DFA Target Value Fund)||27.75%|
|DFSVX (DFA Small Cap Value Fund)||31.37%|
With all that bad news hitting you like a brick smacking at your face, could you have imagined the market would rally this much?
The lesson: There is no shortage of bad news, but there is little correlation between bad news and bad returns.
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