The Chronology of a Market Correction
by Jay L. Gershman
“Thinking or knowing that the value of your investment will be lower tomorrow, is not a good enough reason to sell today.” Jay Gershman, October 2008
Market corrections usually start without warning. Sometimes an announcement of some fear that has already been discussed for some time that has some how caused a different reaction. An example this time might have been, “oil hits all-time high” or “big financial institution takes another mortgage write-down”. The first few bad days do not really raise any alarm for the average market watcher, especially since there are a few small positive days mixed in. Unfortunately, the next few trading days are frustrating because they start off positive and end negative and the losses begin mounting. It’s not too long before days are starting horrible and you’re actually relieved to only lose 4% by the end of the day. Experts start talking about the large volume of trading activity, probably done by institutions and hedge funds being forced to liquidate positions due to calls for capital from big investors and corporations trying to raise cash. When you finally sit down long enough, you realize that every company you own is worth 15-20% less than it used to be and you start telling yourself that the bottom must be near because you don’t remember when some of the prices were this cheap. Unfortunately, the quarter ends, statements are printed and individual investors open their mail. What happens next begins like water over-topping a levy and ends as a tidal wave of sellers with no buyers in sight. At this point panic is the cocktail party conversation that leads investors to even question the safety of money market funds and CD’s. In this particular case, fears of money market funds and Cd’s are exacerbated by announcements of bank failures and money markets with share prices that fall under $1 per share. While the stock market dropped, little was said of corporate bond prices that fell 10% in one quarter and over-night bank lending rates that rose to heights not seen in generations. Instead, stories surfaced of states like California and Massachusetts needing a federal bailout because their ability to raise money was nearly impossible.
People begin to think “If only Congress would sign the bill, that will save us”!! Then “What a relief, they signed the bill…. and the market goes down again”?? “Is the world coming to an end”? “Will this be another Depression”? “Someone else can buy stocks, I’m not going to”! “I wouldn't own stocks if it were the last thing I did”. Worst week on record ends, October 10, 2008, Wilshire 5000 -18.01%.
The weekend allows monetary leaders around the world to meet and address the financial issues head on and in a coordinated fashion. Liquidity for institutions, guarantees for banks and investors are finally happy. Happiness leads to buying and buying forces the greedy short sellers (investors betting on lower prices) to reverse their positions and by the end of trading Monday, indices are up approximately 11% for one day!!! Holy Toledo!
Will this last? Let’s see what has happened since. Gains from Monday held for a few days leading to healthy optimism that the worst might be behind. Wild swings in prices continue but days start ending positive not negative. Hhm. Days start off bad and finish better. “Ok, now were talking”. Bad days not as bad as good days are good. “We’re moving in the right direction, maybe”. “The worst must be over, I think I’ll buy”. Dow Jones climbs 400 points. Things are looking brighter! Experts say recession will be deep, corporate profits for 2009 will be much lower. Corporations announce lower earnings and project 2009 earnings to be lower. Markets lose 400+. Historians say markets like this must end with a thud for us to know it’s really over.
Friday, October 23, 2008 Markets are expected to open 5-10% down. Seems like a thud to me.
Here’s what you may not have heard:
- Oil prices fell below $70 per barrel after having reached $147 just 3-4 months ago. Falling prices will save consumers much disposable income. So much for a dead dollar; as oil has fallen, the dollar has risen 20% against the euro.
- The government is working on a second stimulus check.
- Barack Obama, a Democrat is currently leading in the polls for President. The last three Democrats to take over from a Republican President have led to strong stock market performance over the three months following the election.
- The bond markets have finally begun to trade which has lead to lower interest rates and higher prices. A functioning bond market is necessary for corporations and municipalities to remain viable.
- Market bottoms are often followed by gyrations of positive and negative days but with prices slowly rising over the long term.
- Warren Buffett is buying stock of companies based in the United States.
Here’s what you need to focus on:
- Irrational behavior by some investors or speculators will lead to realized losses as they sell at any price.
- If an investor doesn’t need the money now, they typically shouldn’t sell as the markets are falling.
I’ll repeat: “Thinking or knowing that the value of your investment will be lower tomorrow, is not a good enough reason to sell today.”
I will be available for anyone to contact me this weekend or anytime next week at the office or by cell 860 559-9042.
The information contained herein is solely the opinion of the author and not guaranteed as to the completeness or accuracy provided. Please consult your advisors before making any investment or financial decisions.