Why This Downturn is a Great Investment Opportunity

The recent sell-off in stocks and commodities was not a direct result of the standoff in Congress over the debt ceiling or the U.S. downgrade; but a loss of investor confidence over the ineffectiveness the U.S. and the European Union have shown in resolving their fiscal problems.

I do not see this as a 2008 market crash because the correction is not based on economic fundamentals, but pure emotion, made worse by a breathless media that amplifies the mood of the moment. Because of this emotion, people tend to buy when prices are going up, and rush for the exits when prices go down.

It is important to keep a level head and don’t make any dramatic moves. Your account statements are reflecting the drop in market value. However, this is a “paper loss” only. If you were to sell right now, you will be locking in real losses. If your investments are in a well-balanced, diversified portfolio, you have nothing to worry about. In fact, you should consider this an investment opportunity.

Stock market fundamentals

The fundamentals have not changed from a month ago. The Wall Street Journal recently stated that 80% of the S&P 500 companies reported quarterly earnings that were positive. Many companies have very strong cash positions and are raising dividends.

The United States GDP is greater than the GDP of all other AAA rated countries combined and U.S. debt as a percentage of GDP is about the midpoint of all the AAA rated countries.

Country GDP (Billions) Public Debt Public Debt as % of GDP
   United States $14,720.00 $ 8,670.00 58.9%
   Australia $ 889.60 $ 199.27 22.4%
   Austria $ 332.90 $ 234.36 70.4%
   Canada $1,335.00 $ 453.90 34.0%
   Denmark $ 204.10 $ 88.99 43.6%
   Finland $ 185.40 $ 89.73 48.4%
   France $2,160.00 $1,814.40 84.0%
   Germany $2,951.00 $2,213.25 75.0%
   The Netherlands $ 680.40 $ 439.54 64.6%
   Norway $ 276.40 $ 131.84 47.7%
   Singapore $ 292.20 $ 299.21 102.4%
   Sweden $ 354.00 $ 144.43 40.8%
   Switzerland $ 236.90 $ 130.76 40.0%
   United Kingdom $2,189.90 $1,674.59 76.5%
 Total, except U.S. $12,176.90 $7,914.27 65.0%

Future investment returns

I expect inflation-friendly policies from our government in near term, but I also foresee inflationary pressures as our economy picks up steam. Inflation will ultimately lead to an increase in interest rates and further tightening of borrowing requirements. Mortgage rates are now at a 50 year low, so this may be a good time to refinance if that option is available to you.

I can’t control what happens in Washington or what the folks at the S&P decide to do. Nor can I accurately predict what the markets will do in response, but here’s my prediction…a few years down the road, a lot of investors will look back at their participation in the herd mentality and wish they could have had the fortitude to buy when everybody else was selling.

About the author

Russell D. Francis, CPA, CFP®

Russell D. Francis, CPA/PFS, CFP® started Portland Fixed Income Specialists, LLC in 2012. Portland Fixed Income Specialists is an Oregon fee-only Registered Investment Advisor. We do not accept commissions for financial products or referral fees. Every decision we make is based on the best interests of our clients.

We simplify the financial planning process for you by carefully considering how it applies to your unique situation. We then provide you with the information, advice and alternatives necessary to align your financial decisions with your values, needs, and goals in life. The benefits of this approach are many – you enjoy a greater understanding of the choices you make and are confident when implementing those choices.

And, because we’re a Certified Public Accounting (CPA) firm as well as a Registered Investment Advisor, you benefit from our knowledge of the complex relationship between investments and taxes.

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