As many of you have been hearing, the stock market has been going through some rollercoaster movements lately. Many are worried about another 2008. There is a significant difference between then and now, however. In 2008 we had a systemic downturn. In other words, the financial system was in danger of collapsing. We had been through that before, so I wasn’t worried even then that things would recover just fine (and, of course, they did).
This is just a fairly routine market fluctuation caused by news that was worse than expected. News that ends up being better than expected will drive prices back up just when we least expect it. Moves of an equivalent of 1,700 point on the Dow are not unusual historically. On average they happen once per year since 1900. So far, this move is less than that.
Some of the price downturn is due to hedge funds “repositioning”. Some may believe that these are the best, brightest, and most informed investors. However, Calpers (the California Public Pension – the largest pension in the world) just fired all of their hedge fund managers and have decided to manage the plan using the same principles we use. Enough said…..
Another driver of stock price drops can actually be the catalyst that fuels (pun intended) future profits is oil prices. If oil goes down a major cost of doing business goes down. It also puts more cash in people’s pockets that they don’t have to spend at the pump. There is also an interesting theory floating around that says that Saudi Arabia’s pumping of oil in combination with our new capacity could cause some interesting geopolitical ramifications. It could put significant pressure on the European trouble
makers, Iran and Russia.
As always, the biggest mistake people can make is messing with a well-mixed portfolio and trying to time the market. Investors fail not because the stock market has delivered bad returns, but because they get scared at the wrong times and get excited at the wrong times. Other investment firms give lip service to this, but they don’t live it as evidenced by the volume of selling over the recent past several sessions. The evidence of this is a recent study that showed that an estimated 87% of invested money is actively managed using stock picking and market timing.
Remember that FEAR is: False Evidence Appearing Real. As my, always calm, mother used to say, “This too shall pass.”
