Smart401k Blog

In the headlines

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

• Emerging from a weekend of discussions, the Eurozone announced actions to aggressively deal with the global financial crisis
• The UK government bought majority stakes in Royal Bank of Scotland and HBOS, the country’s largest mortgage lender
• Germany joined the US in putting forth a large bailout package for its financial sector
• In a change of course, the US Treasury decided to invest bailout capital directly in US financial institutions
• Spanish bank Santander agreed to buy US bank Sovereign Bancorp
• Investors in Morgan Stanley cheered as the bank completed its investment from Mitsubishi UFJ Financial
• Intel led a group of companies that topped earnings expectations
• Pimco grabbed the spot as manager for the US government’s commercial paper bailout efforts
• UBS accepted a $60 billion bailout from the Swiss government
• The Federal Reserve’s beige book showed a underwhelming picture of the US economy
• Retail sales fell more than expected in September
• OPEC scheduled an emergency meeting as the price of oil continues to plunge
• Chrysler is being shopped by its private equity owner Cerberus
• Google managed to confound pessimists by beating earnings expectations
• Industrial production fell sharply in September
• Berkshire Hathaway chief Warren Buffett spoke out in favor of US equities in a New York Times opinion piece

Commentary

The market posted strong gains on the week, with the S&P 500 index climbing 4.6% for the week. But I’ll excuse investors that overlooked this fact after getting viciously whipsawed during the week.

After a miserable week last week with the S&P losing over 18%, Monday saw the index soar nearly 12%. Tuesday and Wednesday, however, the market plunged yet again, losing 9% Wednesday alone. A 9% swing from low-point to the closing price led to a 4.3% gain on Thursday, and a volatile day on Friday ended with just a small loss.

It’s difficult to say what was really driving the market this week outside of raw emotion — fear in particular. Not only were the daily changes large, but the trading volume has regularly been double or triple the average over the past two years, and the difference between the high and low point of the day exceeded 7% every day of the week.

Clearly, work toward freeing up the credit markets, economic projections, and the ongoing earnings announcements are playing into investors’ sentiment. However, to say that this is a market being driven by fundamental factors is probably far from the truth.

Looking ahead

The more volatile and emotion-driven the markets become, the more difficult it is to predict what factors will play significant factors in its movements. That said, the news events that will cause the most commotion on the markets next week will likely be those that are unscheduled such as new information on the bailout progress.

Looking at scheduled events, the economic calendar is light as we approach the end of the month, and the weekly unemployment claims and crude inventories readings will likely be most notable. Existing home sales will be released towards the end of the week, but it seems unlikely that that will move the needle too much given the highly pessimistic housing starts numbers that investors have already digested from this week.

The earnings calendar, meanwhile, will be in full force next week with more major companies reporting than I can easily list. The question on earnings though is not only whether they come out better or worse than expected, but whether they will be drowned out by the din of the rest of the market.

In recent weeks I’ve spent a lot of time reviewing similar historical market slumps with the intent to show that we’ve been through similar times before and that we’ll see the other side of this — and along with it higher stock prices. More recently, though, I’ve heard a number of predictions that we’ll experience a stock market over a number of years that will bounce up and down without really going anywhere, and I thought this was worth addressing.

Looking over the history of the Dow beginning just before the Great Depression, there have been three periods of time when the market has flattened out its growth trajectory and basically gone nowhere for more than a decade. The first of those periods was the Great Depression. During that period there were some steep declines and some recoveries, but the market didn’t start to move appreciably higher until around 1949.

The second such period started in the late 1960s. After a peak in early 1966 the market bounced around aimlessly until the early 80s. And what of the third period? Well that started some time right around the end of the 20th century. That’s right, we’re in it. The Dow’s current level of just over 8,800 — we saw that back in early 1998. In other words, we’ve returned to where we were 10 years ago.

Putting this all together I think we need to take away two things. First, the idea that what we’re going through is “unprecedented” sells a lot of newspapers, but it’s doing nothing to help individual investors. While the specific combination of events we’re facing right now may be undeniably new, the idea of financial and economic turmoil putting a strain on stock prices and making the future look bleak is not new.

The other takeaway is the fact that the periods following the market’s long, flat stretches have been incredible wealth creation engines for investors that haven’t given up on the stock market. The market gained over 450% from 1949 to 1966 and climbed well over 1,000% from 1982 to 1999. While frustration over the current gyrations of the market is very understandable, backing away from the market now makes it highly likely that you’ll miss out on the next big bull run.

Fortunately, this week you don’t have to take my word for the advisability of not only holding, but buying, stocks right now. Warren Buffett, one of the best if not the best long-term investor, wrote a great op-ed piece for the New York Times on Friday laying out exactly why he’s putting his own money on the line in support of US stocks.

This entry was posted on Saturday, October 18th, 2008 at 11:03 am and is filed under A Week in the Rearview. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.