I need improvements on the paper I already did it but i have the feedback attached from the instructor

Part I: OVERVIEW OF THE STOCK MARKET

Introduction

The economy and money indexes must be considered when dealing with the stocks on the market. Although the index is a fine way to predict stocks in a healthy environment, in cases of recession and economic (catastrophic) events, such as war and other aspects of history, stocks do take a downward turn. Simply observing this downward spiral is not enough to predict stocks’ performance in coming years, however. This is due to the fact that there are many facets of analyzing stocks prior to predicting which money markets will behave the best in upcoming months, years, and decades. An example of how the stock market might surprise investors could be observed in the last three recent U.S. financial crises, and the Federal Reserve’s response in terms of macro-economic policies and strategies used to combat the economic downturn. The economic (federal) bailout of 2008 not only saved major industries from collapsing, saving jobs and communities all over the U.S., but it also stimulated the stock market—adding value to depreciating stocks, and regaining momentum in the markets altogether. The bailout also inspired citizens to keep investing—creating faith in the markets that have once been null and void leading up to the market collapse. There are, of course, contributing factors that have added insult to injury of the stock market, such as unemployment, the recession of 2007, and a near-collapse of the housing market, but the federal government helped the U.S. economy stay afloat during hard times—leading the U.S. economy to now, behave more profitably than ever. The future economic outlook and analysts’ forecast of the stock market is promising, regardless of the way the money markets have behaved over the past decade, due to the fact that the money indexes keep growing, and the bailout has saved major industries, thus stimulating the U.S. economy, in the long-run.

Background

While it has been common practice to forecast the U.S. stock market by using raw data of returns over the past 10 years, this is not always a smart option. If using raw data from the past 10 years was a fool-proof plan, then it would seem that the stock market has, generally, been offering investors great returns on their money over the past ten years. Adding to that forecast would be the next step for investors with this kind of data—what to do next. According to contributor, Bill Hester (2014), CFA of Hussman Funds, “[a] strategist at a major investment bank argued recently that poor 10-year trailing returns is reason enough to expect lofty returns over the next decade. A similar argument was recently made in Barron's, and by various mutual fund companies.” Although this might have been the protocol over the past decade, Hester (and others) believe that the past rule of thumb should no longer be used: pick a stock that has been generally lacking to do well in the next market upsurge.

The change in the market in the current environment is due to the fact that research is generally flawed. For example:

One piece examines the 50 worst 10-year returns since 1871 to construct a sample to calculate subsequent 10-year returns. The study used monthly data, so many of the observations clustered within a single year. 11 of those "worst" returns occurred during the past decade. Of the remaining 39 months for which the subsequent 10-year stretch of returns is known, 32 of them occurred around 1920, so the study is heavily influenced by a single period. The implicit argument is that the next decade will look much like the Roaring 1920's. (Hester, 2014) (See Table 1.1)

Although there have been implications that the current economic environment of the U.S. will be unforgiving to many of the market indexes of major stocks and markets in the next decade due to the profits made over the course of the past ten years, this is not always a good synopsis of the market turnaround. Instead, investors are researching the reasons for the stock market slack in the past few years, along with projections for economic boosts in the upcoming years which will reflect heavily on money markets.

Table 1.1: 10-Year Rolling Total Returns

Hussman Funds, 2014

The graph produced in Table 1.1 shows how the money markets have been profitable until around the middle of the 2000’s, when there was an unusual dip to the negative. How did this occur? The index only reflects what was occurring in the economic environment to data—and is barely the result of how the market would act in a healthy economy, otherwise.

Economic Events

Investors and economic specialists warned that the recession of 2007, due to heavy lending by banks, automobile retailers, and other industries, would result in a money market crash. According to an article in the prestigious Forbes Magazine by the Associated Press (2008), the issues related to overspending by citizens, marked with increasing unemployment due to the industries above-mentioned overspending, and mismanagement of money in the markets altogether was going to cause an economic downturn that would have affected most, if not all, money markets. For example: “Rising unemployment is not only risky for housing markets, it also cuts spending at businesses, decreases tax revenue and increases public spending, forming a dangerous downward economic spiral” (Associated Press, 2008). Therefore, money investors were getting ready for the downturn of the stock market indefinitely—marked by one of the worst recessions since the Great Depression.

Although the economy did, indeed, was affected by the issues related to these industries, the stock market did not crash. Why? This was due to the fact that money markets are not as fluid as one might think. Many of the major market indexes reflected a surge of stocks during the recession and beyond. Therefore, although the U.S. economy did take a hit in terms of housing, lending, and otherwise, stocks behaved much, much differently.

Three Money Indexes that Prove Otherwise

Visually understanding the current environment also requires historical understanding of why the money markets have behaved in the manners in which they have. Take, for example, the case of DOW Jones. Over the past 10 years, the money index of this market has shown considerable profit, even through the recession and beyond.

As the chart shows, DOW Jones, after the recession surged, and has been increasingly profitable since 2009. Unlike the economy, which has various aspects and facets to consider, the stock market did increasingly well during the federal bailout. During the federal bailout in 2008, the DOW was still affected, but after the bailout, the DOW bounced back faster than the rest of the U.S. economy did—with profits that surged greater than they did prior to the recession in the first place--further enhancing the fact that one cannot simply predict money markets based on performance until that point.

Conclusion

In summary, although the near-ruin of the housing market and other major events such as unemployment during the recession, along with the federal bailout have confused many spenders, investors are not worried. Although it has been practice to sell when the money indexes are going up, this is not always the best outlook for the current economic environment. The recession is over, and the federal bailout has all but saved the economy. That being said, although investors should be cautious to invest in technology and other new innovative solutions and/or businesses, the money index for DOW, at least, shows promise for a few more upcoming years.

References

Associated Press. (2008, Oct. 15).Where recession will hit hardest. Forbes. Retrieved 13 Feb. 2015 from http://www.forbes.com/2008/10/15/economy-housing-recession-biz-beltway-cx_jz_1015econocities.html