newsletter
These Down Markets
January 2008
Watching
these market corrections is like watching a movie over and over again. We have seen it before and we know how
it ends, but we still cry in the middle.
At
the beginning of the year, we reviewed our newsletter from early 2007 titled Recent Market Volatility. In that newsletter we discussed
volatility because we had just been through a 500 point drop in the stock
market. We wrote that we expected
to see an increase in volatility over the next year or two and that given a
historical perspective; the Dow should end between 13,000 and 14,000. The Dow ended 2007 at 13,265, so pretty
much inline with historical averages.
We
saw volatility in ’07 during February, July, August, October and
November, and of course January ’08 was a big fall off. One of our sources sent the following
quote in early January, “
In a
recent publication from American Funds, we are reminded of the difference
between a basic correction and a bear market:
|
A history of declines (1900
– November 2007) |
|||
|
Type of decline |
Average frequency |
Average duration* |
Most recent occurrence |
|
Routine
(-5% or more) |
About
3 times a year |
47 days |
November 2007 |
|
Moderate
(-10% or more) |
About
once a year |
114 days |
October 2002 |
|
Severe
(-15% or more) |
About
once every 2 years |
216 days |
October 2002 |
|
Bear
market (-20% or more) |
About
once every 3.5 years |
332 days |
October 2002 |
|
Source:
Capital Research and Management Company, as measured by the unmanaged Dow
Jones Industrial Average. Assumes
50% recovery rate of lost value. *Measures market high to market low. |
|||
During
January the Dow was down about 15% from its high. Since a bear market is a correction of
20% or more, that would mean the Dow would have to reach about 11,200 to be
considered a bear market. Bear
markets last an average of one year, occur about once every 3½ years and
we haven’t had one since 2002.
Given the averages we could be in for a tough year. On the other hand, the long-term
averages suggest the Dow should end this year somewhere between 14,500 and
16,000.
The
last bear market was caused by the “dot com” bubble. This time it’s been the sub-prime
mortgage mess with plenty of blame to go around! Wall Street, investment bankers and mortgage
lenders making big fees on packaging what are called “derivatives”
and marketing to sometimes large sophisticated investors who were not doing
their due diligence. Mortgage
brokers earning nice fees by placing mortgages without regard for ability to
repay. Rating agencies not doing their due diligence and speculators and borrowers
taking advantage of cheap money.
This all in turn played a big hand in the real estate market’s
downturn, which has now spilled over to the stock market and affected the
general economy. Eventually and
fortunately, markets always correct from abuses.
Some
things to keep in mind during these down markets are:
1
– Don’t panic. Remember
for every panicked seller there’s a canny buyer. Tumbling markets create opportunities
and the rewards go to those with cooler heads. If you have extra money, then look at
the downturns as opportunities to do some buying. Remember, folks flock to the stores when
they’re having sales, so when the stock market is having a sale, why not
buy when shares are cheap?
2
– Keep emotions in check.
Don’t let your emotions override your intellect.
3
– If you are taking withdrawals from your funds, try to reduce those
withdrawals as much as possible until the market rebounds. Operate as much from your cash reserves
as possible during these market downturns.
4
– Trim your budget as much as possible.
5
– Remember what Sir John Templeton said, “Four of the most costly
words in investing are ‘This time is different’”.
This
market will correct as all markets do.
If you consider that the real estate market started its slowdown about a
year and
So
keep a box of Kleenex handy and remember how this movie has ended many times
before. If you really do think
it’s different this time, a reassessment of your asset allocation and a
review are in order.
Securities
through KMS Financial Services Inc.
520.884.7550
jpw@financial-architects.com brienne@financial-architects.com
3971 E. Paradise Falls,