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