Stock Market has best Month in more than a Year

July of 2010 is an example of how the U.S. stock market works. The Dow Jones Industrial Average (the Dow) oscillated up and down, often as much as 200 points in a day, and on a couple of days moved around 300 points. The Dow started the month with the print and broadcast media loudly worrying about a “double dip” recession and an accompanying decline in the markets at 9,773. It ended the month at 10,466, up 7.1%.

Through the month worrying news flooded the press as consumer confidence indexes, manufacturing indexes, deflation, and the possibility of nations in Europe defaulting on their sovereign debt were the focus of the news. Almost hidden in the rush of bad news was the fact that with 70% of the companies in the S&P 500 reporting to date, earnings and sales are both up with profit margins running nearly 10% on average. Earnings, the net profits of those companies, are up 42% from a year ago.

Meanwhile mutual fund investors, a perverse lot whose investments commonly describe where the market is not going, were liquidating their U.S. equity (stock) holdings like the world was about to end. Equity fund investors pulled out $40 million more from their stock funds than was invested in July. From the cash-flows it looks like they are flocking to short-term U.S. Treasuries and insurance policies with the dollars. Most of the out-flows occurred early in the month, so those fearful folk missed a gain that may have been as much as 7% for the month. Based on where the money appears to be going it will be at least two or three years before they can hope so see the gain they missed in this one month.