Smart401k Blog

In the headlines

A look at some of the market movers over the past week:

• Alcoa’s (NYSE: AA) did not start earnings season on a good note
• Home prices in the UK showed notable declines
• AMD (NYSE: AMD) announced that sales will be light and it’s cutting 10% of its workforce; the company’s CTO also resigned
• Washington Mutual (NYSE: WM) raised $7 billion from private investors
• Minutes from the last Federal Reserve meeting and comments from the International Monetary Fund raised recession concerns further
• Pending home sales continued to sag
• UPS (NYSE: UPS) disappointed by lowering earnings expectations for the first quarter
• Crude prices continued to amaze
• AMR (NYSE: AMR), parent of American Airlines, cancelled an amazing number of flights
• Frontier Airlines (Nasdaq: FRNT) filed for bankruptcy
• Linens ‘n Things is said to be nearing bankruptcy as well
• The battle for Yahoo! (Nasdaq: YHOO) rages on and just keeps getting weirder
• Consumer sentiment continues to be on the downswing, while inflation has been making more headlines
• GE’s (NYSE: GE) miss brought the whole market down with it on Friday

Commentary

Through Thursday it was a relatively calmer week than what the markets have seen in recent times. The earnings shortfall from GE, however, broke that on Friday and the S&P 500 fell 2%. The GE miss was notable because GE is an economic bellwether, and it was particularly surprising to the market because GE CEO Jeffrey Immelt had previously been reassuring Wall Street that results would be within expectations.

The broader economic view continues to stay dim. Though the “r” word has been thrown around a good deal, it is yet unclear whether the US economy will see a true recession or just very slow or flat growth for a few quarters. As mentioned on this blog before, whether or not the US crosses into true recession territory — which is defined as two consecutive quarters of negative growth — is of little consequence, what matters is that economic output will fall and that will hurt a variety of businesses.

Inflation has also played a central role in media coverage lately. Soaring oil prices have played their part in pushing up overall price levels, but core inflation — which excludes food and energy — has been rising as well. This has put the US Federal Reserve in a tough position of balancing fighting inflation with easing monetary policy to help the economy cope with the housing downturn and credit crunch.

Looking ahead

There are two camps currently leading competing charges in the markets. One believes that the recent strength on the markets has been an anticipation of an economic recovery in the second half of the year. This group thinks the Federal Reserve’s decisive action in dealing with the credit crisis will pay off and debt and equity markets will regain their footing.

On the other side is the camp that calls the recent upturn in the indices a “fool’s rally,” and does not believe that we are out of the woods yet. These participants see the credit crisis as a deeply entrenched problem that will be with us for at least a few more years.

Both sides of the issue have persuasive arguments and have proponents with impressive records and pedigrees. So who is right? Luckily, those who are investing for the long term don’t have to concern themselves with this question. In fact, they are better off not concerning themselves with it.

There is no doubt that it would be beneficial to have a functioning crystal ball that could show us the outcome and timing of the current problems. The investor that had such insight could stay out of the market until the very bottom and then put all of his chips on the table and reap a windfall during the ensuing rise. This Paul Bunyan of the stock market would then know exactly when to pull his money back out of the market before the next downturn. Rinse and repeat a few times and this giant would be immensely wealthy.

Like Paul Bunyan and his pal Babe, though, the idea that investors can consistently practice this kind of market timing is folklore. You might even say it’s the modern day alchemy. However, what has been a proven strategy for some time is the practice of investing on a regular schedule through a variety of market conditions. This practice allows investors to take advantage of the big-picture, long-term returns of the equity and fixed income markets without having to accurately predict the short term movements of the markets.

This entry was posted on Saturday, April 12th, 2008 at 1:25 pm and is filed under A Week in the Rearview. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.