Most stock markets still deep in the red

By Dan Hallett, CFA, CFP on July 27th, 2010

The list of today’s economic worries seems as long as it’s ever been.  Bearish strategists underline negative economic statistics with 2009’s brisk recovery in stock prices.  But the mathematics of loss/recovery – and more specifically where various asset classes sit today – might be surprising.

So I took a selected list of asset classes and looked at total returns during the worst of the bear market.  But I also looked at where these asset classes stood as of mid-2010 to gauge how much ground we still have to make up.  Below is a table showing 2007-09 bear market declines and the distance from the prior peak as of June 30 for selected asset classes.

Asset Class Peak-to-Trough* (2007-09 bear mkt) Decline from peak* as of June 30, 2010
U.S. Stocks (CAD) -49.8% -39.6%
Overseas Stocks (CAD) -46.6% -34.3%
Global Developed Small Cap (CAD) -49.0% -30.5%
Global Stocks (CAD) -43.9% -30.1%
U.S. Stocks (hedged) -50.9% -29.2%
U.S. Small Cap Stocks (CAD) -46.7% -26.6%
Canadian Small Cap Stocks -55.6% -21.1%
Canadian Stocks -43.3% -18.0%
Canadian Income Trusts -46.7% -12.4%
Emerging Markets Stocks (CAD) -48.5% -5.8%
High Yield Bonds (hedged) -33.2% Recovered by Aug/09
High Yield Bonds (CAD) -27.7% Recovered by Oct/09
Real Return Bonds -16.5% Recovered by Oct/09

Note:  Calculated from monthly index total returns

Data Sources:  S&P/Citigroup,, BofA Merrill Lynch, MSCI Barra

*Some asset classes peaked in 2007 while others peaked in 2008.  Accordingly, some hit bottom in late 2008 while others bottomed in early 2009.  Decline from peak is total return from peak date through June 30, 2010.

While real concerns abound, remember that a stock’s valuation when purchased is perhaps the single most influential factor driving long-term total return.  While stocks look a bit expensive at the index level, many individual bargains are hiding beneath the surface.  That’s what some basic stock screens indicates.

More importantly, it’s what we’re hearing from many of the money managers we hold in high regard.  Stocks are more expensive than a year ago and there are risks to keep in mind when investing.  But this shouldn’t turn investors off of stocks completely.  Rather, it should simply make investors more selective – whether picking stocks directly or via a professional manager.