Thursday's 300 plus point drop on the Dow made headlines in the media, and the feeling was that the sky is falling. But a little perspective is needed. For many, this drop in the market was somewhat expected. While major market indices have made new highs, the breadth of the market has been deteriorating for some time. Last week saw the market rise some on Wednesday led by Amazon’s 24% move, but in terms of the total market, decliners outpaced advancers by a 2-1 margin.
Investors need to keep an eye on the bigger picture. While the market is certainly jittery over the sub-prime mess, it still appears that this is an issue that is self-contained and won’t influence and spread to the rest of the economy. Corporate earnings have been stellar so far, with growth over 9%, which is much more than the pundits predicted. It’s also interesting to note that the recent market rally was lead by professional investors with most “Ma and Pa” investors on the sidelines. I think this will give the market support as we won’t have knee jerk selling and mutual fund redemptions by scared retail investors.
The market tends to overdo it in both directions, and we could easily fall another 5% on sub-prime concerns. But then rationality will take over, and people will realize that the global economic situation is good, corporate earnings are strong, and sub-prime is just an issue for sub-prime lenders and homebuilders. As a former teacher of mine, R’ Moskowitz used to say, “Don’t let emotions get in the way of your thinking process.”
Who knows what is going to happen in the next few days or weeks, but for all of you who want to sell-out, here is a prediction for you. I think we are either going to see the Fed actually cut rates, or at least rumors are going to hit that they are thinking about it, in order to help out the housing market, and the market is, in the words of Dave Neihaus (Seattle Mariners radio announcer), going to fly, fly, fly away.