8/08/2011
Chris
The last few weeks have been rough for the stock market and anyone closely watching them! If you were one of them like me, perhaps you just need to CALM DOWN and GET AHOLD OF YOURSELF!
Haha....That's one of my favorite parts of one of my favorite movies Airplane and it may be just what we need to get a grip! On July 21 the Dow Jones, which is one of the main numbers the news always refers to, was at 12,724. Thursday of last week it hit 11,383 for a loss of over 1300 points or 10.5%. It was down over 500 points on Thursday alone! Generally speaking, your 401k/Roth accounts probably lost somewhere around that same 10% amount during that time. Unfortunately, the market is now at levels lower than where we started the year. In other words, if you started out with $10,000 in an account on January 1st, you probably have less $ in there than when you started. The negativity and fear in the market has gotten to extreme levels over the last few weeks as well.
Unfortunately, the majority of the recent downturn is attributed to all of the stuff going on overseas. Basically, we had our financial crisis back in March of 2009, where the market lost half it's value in a very short period of time. Now the same type of situation is going on in Europe. Countries like Greece, Spain and now Italy are having financial troubles, requiring intervention from the European Central Bank. Luckily, we survived the failure of Lehman Brothers, all the bailouts, etc. and our markets made a nice recovery since then. Now we have to experience some of their pain, since everything these days is global. Our multinational companies depend on demand overseas and vice versa.
The whole bickering back and forth in Congress with regards to raising the debt ceiling and attempting to get our financial house in order certainly didn't help and definitely contributed to some of the decline leading up to the August 2nd deadline. They did succeed at raising the debt ceiling at the last second, however around 8pm on Friday the S&P rating agency downgraded the credit rating of the US government for the first time, from the top rating of AAA to AA+, one notch lower. That is due in part to the apparent lack of ability of the government to resolve the debt ceiling issue quicker as well as not having a good enough plan to cut our debt more over the long term. The government says that downgrade is unwarranted and that the rating agency numbers are flawed, but the S&P stands by their calculations.
Prior to that downgrade late Friday, it appeared the market had stabilized slightly and closed up a bit, even though there was a 400 point swing from the high to the low. Now that the downgrade hit, it's unclear where we're heading, but we will probably be in for additional volatility for a while longer. Most likely we'll see some additional downside.
So what does all that mean to you and me? For me, in my personal trading account I've been very lucky in that I was in 98% cash prior to the recent downturn. I did not want to be in any trades just prior to my trip to visit friends and family in NY state, since I would have been tempted to watch the market the majority of the time. I've been tempted to get back in on a lot of stocks since they're "on-sale" so to speak, many at 20% off regular prices, but haven't jumped back in just yet. If you have a trading account, I'd recommend the same. No need to catch a falling knife or be a hero, better to wait it out and see when things stabilize. However, now is the time to get your shopping list of stocks that you want to buy and be ready to dip your toes in over the coming days and weeks.
Jim Cramer recommends that IF you are looking for stocks to buy right now, you should purchase large cap stocks that pay a high dividend (3.5% or higher) and purchase 1/4 of your position at a time. Verizon is one example and it pays a 5.5% dividend. That means that if you buy Verizon and hold it for an entire year, over that time you'd earn 5.5% interest on your $. That's regardless of any potential gain or loss on the stock itself, certainly beats the .1% you might be getting in a savings account. High dividend stocks tend to be more stable in downturns. You would purchase 1/4 sometime this week for example and then if it happens to go down another 5-10%, you could purchase another 1/4, etc. averaging down as it gets lower, since it's very difficult if not impossible to pick the absolute bottom. Not bad advice overall.
As far as 401k/Roth IRA accounts go, I'd recommend staying the course. Keep up with your regular contributions and the same allocations and just realize you're averaging in at lower prices and things should recover similar to how they did after the March 2009 decline and subsequent rally. If we panic and start to pull $ out of mutual funds and retirement accounts, it will make the problem worse and we'll drop even more. Things usually seem worst just when the market is about to make a recovery. Right now we're at extremely depressed levels as far as technical indicators go, very similar to March of 2009. And we're in much better shape as a nation. We're no longer on the brink of economic failure like we were then, we are experiencing growth, just at a slower pace than we initially thought and we have experienced a decrease in unemployment, however not nearly at the rate expected. So, unless things make a drastic turn for the worse, we should start to even out soon.
Should be another interesting week and it's already shaping up to be a very ugly day. Gold is now over $1700 an ounce and Asian markets were down over 2%. Our markets pre-open are also down over 2%. If all else fails, check out this picture of two of our kitties snuggling up head to head this morning. Not sure you can get any more calming than that! :o)
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