Is This Time Different?

With the recent volatility in the stock markets, I have had several people ask me if this time is different. The easy answer is yes! The reality of the past 13 trading days is that the markets have had an unusually high level of volatility. For example, during the past 13 trading days, we have had 9 days during which the DJIA has moved up or down 400 or more points. Looking at the NYSE operation companies, we have had 9 days during which the percentage of stocks up or down in a given day is 90% (I don’t believe that has ever happened before). As I look at what is happening, it is clear that there are two groups that account for most of this volatility. Small investors have panicked and programmed trading, where computers make the decision to buy and sell based on algorithms. In the first case, small investors, many of whom were burned during the 2008-2009 meltdown of the markets, panicked. “Once burned, twice shy” my mother used to say. By running for the fire exit, many of these individuals, having left in fear, will certainly maintain whatever losses they incurred up to the point of exit and will have a difficult time deciding when to get back in. It has been interesting to see where they are going with their money. Most have gone to money market funds, which are paying nothing, or to gold, which is at its highest in history. As I see gold moving up, I keep thinking of the housing bubble of 2005 when many people said you can’t lose money on gold--oops, I mean real estate. If this volatility continues, we may decide to take some of our equity funds and reduce positions, but to give this a knee jerk reaction is a mistake. I, along with many of you, lived through the dark times of 1974 when markets plummeted. After President Nixon’s resignation in August and his pardon by President Ford in October, the US appeared to be doomed! All of that was forgotten in December as the markets soared. In 1992, we were in an economic downturn, the Japanese were taking over the world and President Bush was kicked out of office because of a dismal economy. Look at what happened between then and 1995. Often, when things seem to be the most dire, Americans bounce back. I believe such will be the case this time, but it sure tries one’s patience as you live through it! I still believe that next year at this time will be better than this year. At this point, this does not appear to be like 2008-2009 but we are preparing to do what’s necessary if the direction does change. Ed Mallon

Panic, Carnage and the Stock Market

Yesterday, the S&P fell by 6.6% and has fallen by 16.77% since July 22nd! Yipes! The overall reason appears to be a lack of leadership in Washington, resulting in fear in this country and around the world, that the United States has run amok. The result is PANIC! Not a great response. As some of my clients gathered, this just might be a great time to buy. But, is that wise? Let’s go back to a famous point in time when panic set in, with the result that the S&P 500 plunged almost 32%. It was the great panic of 1987, and the country was a mess! So what happened? Let me give you two examples using the S&P 500. Your worst-case scenario would have been to invest your money on August 31, 1987. By December 1, 1987 you would have lost 31.97%. If you had hung on until May 31, 1991, however, less than four years later, you would have had a compound rate of return of 7.96%, which is not too shabby. Suppose instead you saw the carnage and invested at the beginning of December 1987 and left your money in until May 31, 1991. You would have done spectacularly well! Your investment would have grown by a compound rate of 19.15%. The real point of this is that you cannot time the stock market. You must make predictions of where things are going in the future, believe in what you are doing and invest accordingly. I believe we are going through a major bump in the road. But in looking at American businesses, I feel they are strong and are undervalued, and that a year from now our investments will be looking good. For now, you need to brace yourself and accept that this too shall pass. Ed Mallon

Stumbling and Bumbling

While it will take some time to determine what the fallout will be in total, for now it appears that Washington's decision to kick the can down the road is having a negative impact on the economy. What has become abundantly clear is that we have a lack of leadership in all parts of the government. The S&P 500 had its worst month in over a year in July. As stocks and bonds suffered losses,US and foreign investors lost confidence. One Congressional representative put it very well: "The Greatest Generation passed the ball to us and we dropped it." Looking forward, the reactions of voters in 2012 will be interesting. For now, both small and large businesses have been left in limbo, which usually results in no business expansion. Consumers also hunkered down with a reported drop in consumer spending for June. The GDP report for the second quarter of 2011 came out showing an annualized growth rate of 1.3%, while the anticipated rate was 1.8%. This shortfall, along with lower revised figures for the first quarter from 1.3% down to 0.4%, shows an economy almost at a stall. The bottom line may well be higher unemployment and less job creation. Investors may see a loss of value for the time being. The good news is that most people have short memories and, as the press moves on to other events, we are likely to see a rebound in stocks and bonds, because by most indicators they are underpriced. We will wait and see. Ed Mallon