We are currently in the midst of the worst global bear market in over thirty years. While the press is doing a thorough job of conveying the negative news, the positive elements of the story are being ignored. Here are a few encouraging thoughts during these turbulent times:
1) A tremendous amount of bad news is already reflected in the price of stocks. Clearly the global economy is in bad shape, but the market is well aware of this.
2) Markets tend to be leading indicators. We can therefore expect the global stock markets to turn higher well before the global economies do.
3) Stocks have provided higher returns than bonds over time because investors perceive (correctly) that stocks have higher risk than bonds. In bad economic times, the demand for risky assets falls, which means the market must pay a higher expected premium to entice investors to accept risk. In other words, investors who are willing to hold stocks during difficult times should earn higher returns over the long term than those who are not willing to hold stocks during those times.
4) Oil prices, which were recently seen as a major threat to long-term global growth, have fallen significantly. As of October 21, crude oil prices were more than 50% below their July record prices. This is the economic equivalent of a huge tax cut to the average consumer. As oil has fallen, so have gasoline prices. Every $0.10 drop in the price of gasoline equates to approximately $14 billion in annual savings to U.S. consumers.
5) Many large investors are buying stocks. Every share of stock that is sold by a nervous individual investor or a cash-strapped hedge fund is purchased by another party who believes that stocks are a good value. As Warren Buffet recently reminded us, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
There will be better days ahead. Anxiety over the market downturn is understandable, but we have lived through many crises before. If you click on this link (Bull and Bear), the chart shows that bear markets of this magnitude have occurred several times in the past, and the market has been resilient. Capitalism is not dead, the world economy will move on, and discipline will be rewarded.
As always, we are available to address your questions and concerns.
|
