Heeding Market Warnings

If there's one place an investor can find clear direction in a sea of opposing opinions, it's BusinessWeek. According to the following excerpt, we're in for some tough times:

Stocks are swinging up and down more often and more violently than at any time since the Great Depression. As recently as 1995, the Standard & Poor's 500-stock index traded all year without once changing 2% in a day. But [recently], it gyrated that much or more on 52 days -- once in every five trading sessions -- the most since 1938. The tech-laden NASDAQ now swings by at least 2% on two days out of five, vs. just once every 10 days nearly 30 years ago.

...fundamental changes are taking place that will likely alter investing and the very structure of the market for years to come. Millions of ordinary buy-and-hold investors, who have been a major stabilizing force in the stock market, are bailing out. If history is any guide, those investors won't jump back in quickly... "This is a new, rapid-fire trading kind of environment that just stymies average investors," says James W. Paulsen, chief investment officer at Wells Capital Management. "Old dogmas like 'buy and hold' just don't work."

In fact, says Richard Bernstein, chief U.S. equity strategist at Merrill Lynch & Co., a big reason for the recent market volatility and falling stock prices is that investors are just beginning to see how vulnerable stocks are to unpredictable corporate earnings. "Investors have been underanticipating risk," he says. Sooner or later, they'll become less willing to pay up for stocks with more volatile earnings and wild price swings. And they'll demand lower share prices as compensation for the extra risk they're taking. "Even if a cyclical bull market reappears, it's likely to be modest," says Charles Pradilla, chief strategist at SG Cowen Securities Corp.

On top of all that, the markets have to deal with heightened geopolitical risk.

We aren't necessarily condemned to a multiyear bear market. But perhaps investors should be prepared for several "mini-bear" and "mini-bull" swings of at least 20%, which occurred in the five years preceding the 1973-74 bear market and in the eight subsequent years. There are, of course, big differences today: Inflation is nowhere near the heights it reached then, interest rates are low, and the Federal Reserve has been proactive.

In any case, many average investors are again paralyzed by market uncertainty. Hiding behind decimated portfolios -- or cash, if they're lucky -- they're afraid to jump back into the fray.

That doesn't look good, eh?

Before you get too nervous, ask yourself when it was written. Last weekend? Before the lows in March? Before the lows in January?

Nope.

Try the March 10, 2003 issue, just before the spectacular recovery from the dot com bust got underway in earnest. Here's how the S&P 500 did after the article:

• +37% in one year
• +44% in two years
• +57% in three years
• +88% through last October's high
• +69% through Wednesday's close

Folks, if you never invest until there's an all-clear signal, you'll never invest.

Comments

[Pauly B]

If one is a long term investor the long term chart from 1929 and on; the chart is up up!!! The key is long term and not worrying about what sector is in and what is out. It seems to me for the long term a well diversified portfolio and total portfolio return will pay more than any CD rate the bank will pay. Because we live in a remote control society we like to flip the investments just like we flip the channel. Just be careful where you are flipping too....

[adan]

buy and hold recommendations never quite seem to signify if that'd be true past a certain age

or close to or at an age where preservation of capitol is more important; last i heard, none of us regular guys were being backstopped by the fed (hey, not that'd i'd mind, if the check was big enough :-)

[fxtrader07]

i fully agree with the author this time. and the logic presented by the cited "pros" strikes me as being particularly odd: " "This is a new, rapid-fire trading kind of environment that just stymies average investors," says James W. Paulsen, chief investment officer at Wells Capital Management. "Old dogmas like 'buy and hold' just don't work.""
Hm, so wilder daily swings mean that buy and hold is supposed to be dead? How is that? What difference does it make if the value of my investment swings by 1, 2 or 3 % a day when the long term return isn't determined by these short-term fluctuations anyway? Quite the opposite - when retail investors go for daytrading and institutional managers further decrease the average holding period, it makes all the more sense for the smart small investor to buy value at good pürices and hold on to it. Better yet, higher volatility makes for higher options premiums - so you might make a few additional dimes by writing covered calls and selling some naked puts.
What i agree with though, is that the expectations of returns on investment are running still way too high with most investors - retail and professional alike. And these returns cannot be increased by trying to catch the short-term swings, rather such attempts will virtually guarantee a mediocre performance over the long term.

[sivere]

Here's a warning:

If we do not TakeBackTheFed.com , WE ARE DOOMED.

[DaveW]

sivere, you're the Seeking Alpha equivalent of a pillow-headed, wild-eyed rambler waving around a "The End is Near' plackard.

[sivere]

I am not saying the 'end is near'. I am saying, let's avoid a collapse by doing this:

TakeBackTheFed.com

What do you propose? Find a better investment for your money? This is not just about DaveW's investments.

[ed auerbach]

Great piece. Perma bears never go away and they usually go broke. All the way back to the great shorter Jesse Livermore. The more pessimism the better the recovery.

[John Egan]

My gut feeling is that as suggested in 'Future Shock' and 'The world is Flat', that everything is speeding up... I just finished reading the Nicholas Darvas book 'How I made $2,000,000 in the Stock Market' ... Good reading and lot of lessons to be learned... I guess what impressed me most is the fact that he was a dancer and invested his earnings... I think a lot of what drives the market now are retirement IRAs funded by companies. The other item of note was that he was reading a newspaper and 'calling or cabling' his broker for trades... A much slower business than the online brokerage that most of us use today.

These two points suggest to me that the old 'buy and hold', or 'purchase an index fund', just doesn't work for the MTV generation.

Thx jegan ;-)

[DaveW]

sivere,
one suggestion. You may get a greater number of people going to that link by sharing some compelling and CONCISE information that piques ones interest. Your approach of 'Doom Cometh' falls short here on SA

[sivere]

Thanks, DaveW, I ahve tried a number of approaches! Once you get there you will see ti is not all doomy, but rather straight forward.

[galewhitaker]

Dear DaveW
We doom and gloomers know that "this time its different" because of peak oil. A world built on $30 oil can not function in a world where oil costs $130. If it costs Joe Sixpack $250 for a fill up he is going to starve. If it cost Joe $20,000 to heat his home he will freeze. Its going to take a while for the world to replace the 600,000,000 gas guzzlers with more efficient cars.

[sivere]

Thanks Galewhitaker. I talked a bit about peak oil (as a worst case scenario- if we do not act) in my May 8th commentary.

I do see $130 barrel oil as an opportunity to get the alternative energy process started. Sometimes I wonder if it is not a policy just for that purpose.

[dougnhi]

This article is pure crap. To compare now, when stocks are just marginally off the all time highs, and the banking system is in total disarray, to spring of 2003, when the market had already run down a huge amount over the prior two years, is a fools game. You should go work for CNBC....they'll love you! Meanwhile, for everyone else, beware wolves in sheeps clothing like this author.....they've got a lot of overpriced stock to sell you and if you buy in, you'll only have yourselves to blame.