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Looking Up in a Down Market! |
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 Our last quarterly update talked about the financial markets just squeaking by a bear market. Unfortunately, I have to report that the bear market has arrived for the Dow Jones Industrial Average. As of last Wednesday, the Dow is down 20% from the October highs. Can it go down further? The average decline in the past bear markets (post 1940) has been down 30.40%. On the bright side, when the bear market officially hits, it is generally 50 -70% over. When does it recover?
The ingredients to ending this bear market will most likely be:
1. Relief from rising energy prices.
2. A more rational housing market (most sellers have woken up but buyers still want gouge the sellers).
3. Banks that are more willing to lend.
How all this comes together will be a day by day process. I can give several different scenarios and everyone has an opinion so we need to stick with the current facts. In the end, what we ultimately look for are signs that corporate earnings have bottomed and will be moving higher in the near future. These rumblings will start to move equity prices higher. The stock market is what we call a leading indicator. The stock market will move higher before the economy recovers. So, if you wait until you are really feeling comfortable, you will have missed a majority of the move in the market!
I always say that it is difficult to invest based on what is happening in the economy because it is out of our control. My job is to keep my eye on the ball, which in this case are stocks. After running my analysis as of June 30, the S&P 500 is trading at a 30% discount to its' 10 year P/E (price to earnings ratio) average and has a 2.2% dividend yield. Many individual stocks are selling at even more compelling levels.
I understand how difficult these markets can be for people who do not do this every day. So, if you have any questions, please do not hesitate to e-mail me!
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