Now that the Dow has fallen 10% from its October 2007 peak of 14,164 to 12,743 -- i.e. now that it officially qualifies as a correction, it's a good time to summarize the investment landscape, fundamental and technically. Although numerous fundamentals (high energy prices, subprime mortgage defaults and subprime-asset losses, housing sector slump, slowing U.S. consumer spending) suggest U.S. economic growth will slow up ahead, and hence that more selling is ahead for the Dow, that, in fact, may not be the case.
If limited to roughly 10%, the Dow's decline constitutes solely a correction. Keep in mind also that the Dow is a lead indicator that always points to economic conditions 6-9 months ahead. Hence, investors, if they believe that measures being taken are addressing important concerns, could conclude that economic conditions will improve and hence send the Dow rising very soon.
Also keep in mind that market bottoms, tops, even reversals, are processes, not events. It takes many (daily) data points to form a bottom, form a top, or a reversal. This fact is often overlooked in today's immediacy-oriented investment environment.
Hence, a brief, mild rise in the Dow from 12,743 would not signal a reversal: it could be merely short-covering by investors who believe that current sub-par economic conditions (or worse) are likely to continue. Conversely, a brief, mild additional drop in the Dow does not necessary signal something worse for the economy in the months ahead: that minor, additional selling could be the final stages of a market bottom.
Also, while few investors are thrilled at the prospect of seeing their stocks or portfolio fall 10% or perhaps more, it's important to point out that stock market corrections are a normal part of rising stock markets, and were relatively common prior to the 1990s. There have been 43 corrections since World War II, according to Thomson Financial. Equally important: only about 25% of the corrections have led to a bear market, a 20% decline in stocks. A stock market correction does not guarantee a bear market.
Market Analysis: What's the appropriate stock market stance today for an investor? Much will depend on your investment horizon and/or your risk tolerance. If you are about to retire, need to raise cash, or are skittish at the prospect of the Dow dropping more - - or even just skittish about the Dow moving sideways for another 6-12 months - - you may want to consider decreasing your exposure to stocks.
The above is not an attempt to gloss over the very real problems the U.S. economy currently faces. And, to paraphrase former U.S. Vice President Al Gore, you don't have to be a Harvard mathematician to recognize that the nation has a full plate of economic concerns.
But if your investment horizon is longer than one year, and you can tolerate risk, keep in mind that for total, average, annual return on equity over decades, no investment class performs better than stocks.
Hence, a brief, mild rise in the Dow from 12,743 would not signal a reversal: it could be merely short-covering by investors who believe that current sub-par economic conditions (or worse) are likely to continue. Conversely, a brief, mild additional drop in the Dow does not necessary signal something worse for the economy in the months ahead: that minor, additional selling could be the final stages of a market bottom.
Also, while few investors are thrilled at the prospect of seeing their stocks or portfolio fall 10% or perhaps more, it's important to point out that stock market corrections are a normal part of rising stock markets, and were relatively common prior to the 1990s. There have been 43 corrections since World War II, according to Thomson Financial. Equally important: only about 25% of the corrections have led to a bear market, a 20% decline in stocks. A stock market correction does not guarantee a bear market.
Market Analysis: What's the appropriate stock market stance today for an investor? Much will depend on your investment horizon and/or your risk tolerance. If you are about to retire, need to raise cash, or are skittish at the prospect of the Dow dropping more - - or even just skittish about the Dow moving sideways for another 6-12 months - - you may want to consider decreasing your exposure to stocks.
The above is not an attempt to gloss over the very real problems the U.S. economy currently faces. And, to paraphrase former U.S. Vice President Al Gore, you don't have to be a Harvard mathematician to recognize that the nation has a full plate of economic concerns.
But if your investment horizon is longer than one year, and you can tolerate risk, keep in mind that for total, average, annual return on equity over decades, no investment class performs better than stocks.
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Reader Comments (Page 1 of 1)
11-27-2007 @ 12:34PM
william lindblad said...
The analysts and economists are in a decision making tizzy and consequently, the dow lacks direction.
My expectations are that in July 08 un-employment will be in the 7-8% range.