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 fundamentalsThe 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%|
|Denmark||$ 204.10||$ 88.99||43.6%|
|Finland||$ 185.40||$ 89.73||48.4%|
|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%|
|Total, except U.S.||$12,176.90||$7,914.27||65.0%|
Future investment returnsI 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.