I apologize for my lack of posting yesterday, as anyone with a t.v. would understand, the U.S. stock market has been trading in an extremely erratic manner. Here's what has happened over the past 11-days and more specifically over the past 2 (since friday).
- On a 10-day trading basis, we have only been this oversold (down) two other
times in history. The only two times was the stock market crash of 1987 and
when Germany invaded France in 1940
- The stock market is down nearly 12% between Friday and yesterday (Monday)
- The volatility, which is merely the speed and sharpness of the moves up and down in the market, has rarely ever been seen before (the last time the markets swung from positive to negative as quickly as they have was during the crash of 1987 and the "flash crash" of 2010, when the computers/machines that coordinate the markets went haywire)
Over the past week or so, and especially over the past two days, I've emailed back and forth with other money managers more than I ever have before. Here is the over all consensus and feedback that I have gotten back:
- The action in the stock market does not resemble that of 2008 when our economy fell into a recession following the banking crisis; we have already experienced our 2011 version of the 1987 crash (this opinion, which came from one of the smartest and most successful money managers in the world, Doug Kass, was featured in the Wall Street Journal this morning).
- Most of the downside risk in the market could already be behind us..this is due in part because markets don't just move down in a straight line. At some point, as stocks "go on sale" and become cheaper, investors who buy stocks low and sell them high will step in and start to buy these discounted and valued companies.
- Some people are comparing the recent selloff in the markets to that of 2008 when the banking crisis began as a result of the mortgage and housing mess. The main difference is that our banking system is now solvent and secure, and our economy is growing - although at a slow pace.
- The whipsaw action in the markets are unlike any that many money managers who've been in the business for 30-40 years have never seen before...and the reason for this is that a great amount of the trading that takes place is by momentum traders and computer programs that do not monitor or invest on fundamentals or economic developments, but rather on price momentum and volatility. Because of this, the only way to approach investing in these markets is by examining and focusing on your time horizon (meaning try to focus on the longer term picture of the stocks and investments you own).
- A lot of the volatility and downward pressure on the markets have come from Hedge Funds, which are large pools of money that the ultra wealthy (those with at least 1 million dollars in liquid cash) can invest in. Several of the largest and best known (and best performing) funds got caught leaning the wrong way and as stocks they owned started to crash down, they had to liquid and sell out of them on the way down because they had to...the already nasty selling therefore begets more selling and all of a sudden stocks are in a free fall.
I know I've written a great deal this morning on what's been happening and why, but more importantly I'll be back shortly writing about what to do now in leu of the massive crash down that has happened. I will say this, in talking to all the money managers I do, the smartest ones, say in order to make money you have to sometimes watch stocks you own go down...AND if you have good information and a strategy on the stocks you own, wait for the right moment to come along and slowly look to buy more of them so that when the overall markets turn around and the stock you own does what you expect it to (like Etrade getting bought out!), then you will make even more money. For example, following the crash of 1987, the banking crisis of 2008-2009, and the computer flash crash of 2010, those individuals who put there money to work and started buying stocks/bonds/mutual funds when most others were selling, made a ton of money (this is why its been so important to have a lot of cash in your account).
Be back soon.
