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Debt Ceiling Impasse: Now What for Stocks?

Bad news does not always equal bad returns.

Michael Zhuang, 07/22/2011

If the recent headlines make you feel like a financial perfect storm is brewing, 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 U.S., politicians are engaged in high-stakes political brinksmanship regarding raising the debt ceiling, without which the U.S. will go into default for the first time in its history.

No wonder some advisors are pulling all of their clients' money out of stocks. But shall we? 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

Dow Jones

20.53%

S&P 500

20.3%

Nasdaq

24.75%

DFFVX (DFA Target Value Fund)

27.75%

DFSVX (DFA Small Cap Value Fund)

31.37%

With all that bad news, 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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