Is this bull crazy enough for you?
The finance blogosphere has been abuzz about the stock market lately, for obvious reasons. The market has been careening around wildly like the drunken bull that it is, and has caused even the most steadfast among us to become nervous. It has caused some of us to jump into action. Whether these moves were unplanned or not, this is a sign of the times. What’s happening to your investments today has no doubt planted some thoughts in your head such as:
So what camp do you belong to? I’m going to say that I’m in category #2 — I’m in the buying camp. I don’t particularly see an aging bull just yet and my money is on this being just a correction. But we’ll see.
Already, it appears that on the second week of August, the net outflow from mutual funds is pegged at around $13 billion, the most ever redeemed since the 9/11 attacks, when net redemption from funds stood at $16 billion. That comparison says quite a bit. As far as terminology goes, let’s remind ourselves for a moment about how the stock market is typically described:
We’re in a bear market if we’re down 20% from the peak.
We have a correction if we’re down between 10% to 20% from the peak.
We’re riding a bull if it’s up greater than 20% over the span of a year.
Technically speaking, we’ve touched 10% last week in the middle of a trading day so there’s some potential here for more pain in the coming days. From what I’ve seen in the past, as someone who’s lived through several corrections and two bear markets, these things take a while to wind themselves down. So a revisiting of the bottom is likely to occur, especially if bad news continues to permeate our economic and financial atmosphere, and the media insists on dwelling on the negative.
Let’s take a look at what is causing all these jitters and review why the market’s gone to the dogs for now.
Reasons for the Stock Market Gyrations
You may have heard of the basic reasons: it’s the sputtering housing market, the subprime lending mess, tightening credit, weak dollar, yada yada yada. You can also probably toss in the fact that at one point this year we were facing some record highs in the market plus the fact that we’ve been riding a mighty fine bull since March of 2003, making this bull market out to be a four year old. And if things aren’t going to be any different this time, then market cycles dictate we should be expecting this volatility right about now. The bull may not be that old, but it’s still vulnerable to cyclical shake-ups.
So what begun as some credit troubles affecting the housing sector has escalated into some sort of “financial contagion”.
“This is classic financial contagion,” said Russ Koesterich, a portfolio manager at Barclays Global Investors in San Francisco. “You’ve got people in multiple markets. Losses in one force them to capitulate in others.”
So far, as is typical of any correction or bear, the sell out is mostly due to the actions of institutional investors and big money managers (the so-called market makers) who delve in high-risk and complex investments. They bail out while regular investors like you and me stay put. I’m of the mind that it’s the sanity of the small investor that doesn’t make things worse than it already is.
I do, however, get nervous when I read bits like this:
Exotic financial products created from mortgages in the last decade or so are being tested for the first time in a market crisis, pushing investors into uncharted territory. No one knows the full extent of the losses caused by the failure of a mushrooming number of subprime mortgage borrowers to pay back their loans.
But then I remember sitting through the savings and loans crisis, the emerging markets debacles of years past and the massive dot com bubble pop and I say to myself, bring it on! I look at it as just another crisis or just another war or just another financial set back that we all get through at some point. If you can bury your head in the sand when all this is happening, you would save yourself a lot of Pepto Bismol.
So what are we supposed to do to feel better?
All Is Not Lost
We should keep in mind that the market is in the throes of some technical trends brought about by a lot of emotional trading activity. Fundamentally, it’s not supposed to be as bad as it seems:
But the selling went well beyond the day’s events, said Jack Ablin, chief investment officer at Harris Private Bank “It’s all driven by technical factors at this point, because the fundamentals of the market are good,” Ablin said. “But people aren’t really looking at the fundamentals right now. They’re hitting the sell button.”
Georges Yared, chief investment strategist at Yared Investment Research, said the major gauges probably have another 3 to 5 percent selloff looming before a significant recovery is staged. “Credit worries are gripping the market,” Yared said. “This is an environment where it’s shoot now, ask questions later.”
You’d think it wasn’t so bad if you believed that the supposed financial contagion triggered by the exotic mortgage crisis is actually more contained than it’s made out to be. Is this contagion an exaggeration? Is the subprime lending crisis more isolated than people are saying? You’d also probably feel better if you believed that while external forces are out to potentially ruin your retirement, external forces are also around to save the day. For starters, these watchdogs can have a couple of things up its sleeve (like it has in past meltdowns):
What should we anticipate in the coming weeks?
The Fed could cut rates.
After holding short-term interest rates steady at 5.25 percent for more than a year, many investors and other Wall Street pros are looking to the Federal Reserve to cut interest rates at the central bank’s upcoming policy meeting Sept. 18.
Central banks can pump in some liquidity into the monetary and banking systems.
To that effect, the Fed has been adding additional temporary reserves to the banking system, as well as reminding market participants of the normal reserves it puts in place. The Fed added $17 billion last Thursday. Central banks in Europe plowed funds into the monetary system more aggressively than the Fed last week.
Just when you’re starting to think you’re about done with this investing thing, you may be relieved to learn that some things can still bail us out (albeit we don’t want to get into this mindset!). You don’t want to be left out when things turn around. The issue here is whether you’re keeping the faith: that these bigger moves by these even bigger market makers are the right ones. Hopefully this will be enough.
Other Resources:
Dow Makes Stunning Comeback
Why The Market’s Going Nuts
Image Credit: Sydney Morning Herald
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I’m number 3 . . . not because I’m afraid, but because I’m lazy.
A big problem we’re facing is that we’re getting used to the Fed bailing us out each time the markets behave badly. This teaches us to be complacent investors, borrowers, consumers. It’s like the “boy who cried wolf”… and it will be business as usual once the Fed does its thing and the market is on track again.
I’m definitely #3. Better off not knowing. If you have a good investment strategy, and you’re in it for the long run, there’s no real need to start looking into your account every minute. I actually fell to the urge once last week and immediately wished I hadn’t, since I had a sudden panic urge to sell.
I do think it turned into a panic, though. After 9/11 there were serious market instabilities – it took a week for the NYSE to reopen, there were the anthrax attacks and so on. Now it’s a small slice of the housing lender market failing. No small thing but not a sign of a long-term structural instability. The Fed overreacted massively, I think, and we’ll soon see a new round of irrational exuberance as all of that funny money props up the system again – which is great for those of us who stay in the market, right? Right?
@Telemill,
Sounds like you may have been hanging around Lazy Man’s blog too much. If not, you should. He’ll show you what true laziness means (his money does all the work, apparently).
@John,
Cycles come and go, and the Central Bank, Fed, and so on do their thing to keep things humming along. The bull market’s strength can attest to the banks’ success at getting things under control (in these cases). I don’t quite subscribe to as cynical a view as you do with regards to intervention.
@Brip Blap,
I remember those anthrax scares. If it’s not that, it’s something else scaring us. I remember the avian flu thing a few years ago too. Oh my, now you got me all paranoid. I’m much more nervous about plagues than I am of stock market crashes. Must be because I haven’t seen a plague up close yet, whereas market crashes/dips/shakeouts are a dime a dozen.
If the stock market makes you nervous is is critical to asses your asset allocation. If you can’t withstand a market correction, then you should have a more conservative allocation. One of the biggest mistakes is buying high and selling low.
SVB, thanks for the plug. I’m actually finding myself in #2. Unfortunately, it looks like things are already getting better before I can get some significant money in.
From what I’ve read the big money boys are liquidating so that they can cover their debts which were created by exotic financial transactions. And the bailing out by the Fed and European Central Bank is definitely not a plus in my view. I’m heading for the gold!
SVB, it’s the fear and irrational lack of it that drive the American markets. One about of about three different bad scenarios will happen someday in the near future and send the markets on a kooky free fall that will make this correction look like a teeny blip:
1. Another terrorist attack in the US
2. An outbreak of disease X somewhere in the US or Western Europe
3. A significant corporate collapse (imagine Enron happening to GE – it could, there are no sacred cows…)
Cheery stuff!
Hi,
If you could give me some advice i would really appreciate it:
I have invested £90,800 with HSBC. My financial advisor there talked me through it all and, based on his understanding of my level of risk taking, we placed it into a Taxed Plan. This was split 10% here, 10% there etc. Some in low risk, majority in medium risk and 5% in high risk. This was in December 2008. In January 2009 i had £94,000. Now, March 2009, I have £84,000. I have had £10,000 wiped off its value in 8 weeks. This has really made my knees wobble! I am now considering cutting my losses, cashing in and putting my money into a property which i will live in. I am new to investment, i do not understand it completly. I would really appreciate some advice – i do not know what to do. Should i cut my losses and grab my £84k now, or do i leave it in. I do understand that i am only 4 months in to a 5 year plan but i dont understand what the point to leaving money in an investment that is going down – and i expect it to go down more. Should i take what i have now or shut my eyes and look again in 5 years???
Kev,
First off, I am not a financial professional and neither is anyone who joins our discussion here (as far as I know) — we’re just regular people all in the same boat as you. But here’s what I can say: the conventional wisdom of long term investing is to stay put. Is your money for the long term (say for 10 years or longer?). If so, then you should “stick to your plan”.
But it seems that you also have a property you own. And you are right — that is an investment. Here’s the thing — if you can accept your losses and cannot take the volatility, then sure, put your money towards your property. But realize that there is a huge risk of missing a recovery and potentially making up your money at some point.
If you realize you aren’t able to handle the volatility, then you should put your money in something “safer”. There is a huge risk here that as soon as you switch investments, your original investments will go up while your new investment doesn’t (or worse, goes down). It commonly happens…. why? Because the “bad” investment usually recovers eventually, while the “good” investment you see now may have it’s day to tank.
It’s a big decision to do this, and nobody knows what tomorrow will bring. But do the switch if you are prepared for anything — even losing out on the possibility of a powerful recovery. It’s happened many times in the past — but you can’t say for sure what’ll happen this time (though the chances are that it will happen again). We can only talk probabilities here.