Stocks - November's wild ride to nowhere

Specialists Robert Tuccillo, second from right, and William Bott, right, work at a post on the floor of the New York Stock Exchange Wednesday, Nov. 30, 2011. Stocks soared in morning trading Wednesday after major central banks acted together to support the global financial system by cutting short-term borrowing rates. / AP Photo/Richard Drew

A ferocious rally of 490 points on the last day of the month was enough to help the Dow Jones Industrial average eke out a 0.8 percent gain in November, surging 700 points in the last three trading days. A broader (and more useful) measure of the market, the Wilshire 5000, gave up 0.5 percent, giving back a small fraction of the 11.5 percent stocks gained in October. The Wilshire 5000 index is the total return of virtually every publicly held company in the US.

Gloomy news from Europe is said to be the cause of November's poor stock returns through the end of last week, as Italy now joins the ranks of Greece, Portugal, and Spain in needing help from stronger European neighbors such as France and Germany. Of course, the news was equally gloomy in October, which was the best month for stocks in 24 years. The Wilshire 5000 was down 6.5 percent for the month as of November 25.

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The market, however, surprised us in the last three trading days of the month, as the market often does. Stocks surged, erasing much of that 6.5 percent loss, even though European debt woes continue.

For the year, the Wilshire is down 0.3 percent. Without a Santa Claus rally, 2011 could be the first year since 2008 in which stocks declined. It will also prove the January Barometer wrong, which says an up market in January means an up market for the rest of the year for stocks. The much narrower Dow index is up 4.0 percent for the year. This gain was due in large part to both the strong performance and heavy index weighting of one stock -- IBM.

The experts had predicted 2011 stock returns between five to 15 percent. Pimco's Bill Gross now thinks five percent annual returns for the next few years will be among the top performing portfolios for either stocks or bonds.

Not since early 2009 have the economic headlines seemed so negative. Though there is a silver lining to be found in all that negativity. There is research that indicates poor economic news is predictive of strong future stock returns.

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Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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awfrey100 says:: Interesting article. Here's a bit of good news from my employer, Fisher Investments: http://fisher-investments.typepad.com/fisher_investments/2011/12/fisher-investments-research-uncovers-four-things-you-might-have-missed.html; reply

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JerryNA100 says:: I made a little bit of money this year by *yawn* rebalancing. Dull, yes, but I'm making money even though stocks are flat overall. Thanks, Allan.

Jerry A.; reply