| Most major international stock indices are dropping fast. In fact, stock markets in Asia, the United Kingdom, and Europe have all now seen the fury of the bear. A bear market is generally defined as a drop of twenty percent from the market's previous high. Indeed, it was only last October, when all of these global stock markets were about twenty percent higher than the levels of today.
Conditions in the United States equities market are not any different from global bourses. Since last October, both the Dow Jones Industrial Average and the NASDAQ have fallen by about twenty percent and entered bear market territory. It is common that, in most bear markets, the mood of the general public is grim. This time is not any exception. More than 80% of Americans currently think that the country is heading in the wrong direction. Indeed, half of the country even thinks that America's best days are now behind it.
The public's mood is not about to improve as second quarter 2008 IRA, 401k, 403b, and brokerage statements arrive in the mail, a quarter that includes a 10.2% drop in value in the last month alone. In fact, it was the market's biggest June loss since the Great Depression. The U.S. stock market has now lost $2.1 trillion in value this year with a $1.4 trillion loss in the month of June alone. However, in equity investing an investor should not focus on what has happened, but instead consider what will happen next.
If only we had a crystal ball, the market's short term future would be so much easier to see. The many questions that overhang this equity market would suddenly become answered and the market would move accordingly . Unfortunately, the truth is that we would really need the help of Nostradamous to accurately answer all of the questions necessary to predict the stock market's direction in the short term.
Indeed, the questions that will determine the markets future direction do seem endless; How long will the United States recession last? Will there be a global slowdown next? Is $150 the top for a price of a barrel of oil or will it go even higher? Is this just the beginning of an inflationary spiral that will send gold and silver to all time highs? When will the real estate market stabilize? How much longer will the major banks continue to pay the price of the sub- prime mortgage collapse? Will there be a global war with Iran in the next six months? Will the U.S. dollar continue to fall against the rest of the world's currencies? Who will win the U.S. Presidential election and will it even matter to the economy and consumer confidence?
So many questions that are impossible to answer. That is why it is futile to try. In fact, it is sure financial folly to attempt to time the equity market and therefore it is impossible to accurately predict this bear market's end in advance. Remember, an investor is in equities for the long term (at least five years). The true investor understands that dramatic fluctuations are common and a part of the economic cycle. A real investor looks at the market of 2008 as a unique long-term buying opportunity for an investment in high quality common stock.
So, here are three facts from history to help investors overcome shock as we open and review the sad results from our 2008 second quarter investment statements. (1). The Dow has been declining for 262 calendar days, which is shorter than the median bear market of 363 days. The market's decline so far also is not as severe as the 26.9% average for a typical bear market. Therefore, the twenty percent market decline in the face of all the problems in the banking sector and the economy has so far actually been shallow compared to the average bear market of the past.
(2) The stock market will improve when the economy improves. Many financial pundits think that the economy entered into recession in February 2008. How long this recession will last is anyone's guess. However, history does tell us that the average recession since 1945 in the United States has been an event that has lasted about ten months. If this recession is shallow, it may already be near an end.
(3) The biggest gains in the stock market occur on a recession rebound. Everyone talks with horror about the great depression from August 1929 to March 1933. In fact, the Dow plunged 84.2% during that period of time. However, just one year later, the market had recovered most of that huge loss by achieving an 81% gain. A similar story of recession with subsequent sharp market recoveries can be seen throughout American history.
It is obvious that the bear rules the equities market in 2008. However, the bull will eventually return to Wall Street. History tells us that the return of the bull after a recession brings the biggest rewards to those investors that have withstood the fury of the bear. Certainly, it is market conditions like these that highlight the difference between being a long term equity investor and a short term market timing trader. The truth is that the latter needs a crystal ball while the former needs a level head and time.
James William Smith has worked in senior management positions for some of the largest financial services firms in the United States for the last twenty five years. He has also provided business consulting support for insurance organizations and start up businesses. Mr. Smith has a Bachelor of Science Degree from Boston College. He enjoys writing articles on political, national, and world events. Visit his website at http://www.eworldvu.com
|
