A ‘Tsunami’ hit the stock market — now what?

The stock market just endured the worst October since the crash of 1987. It was slammed by what Alan Greenspan called a “once in a century credit tsunami.” He said it shattered some of the models he has relied on over the past 40 years.

Volatility hit levels I’ve never seen in my 25 years of investing. The selling was massive and it affected every asset class. Whether you invested conservatively or aggressively, everyone felt the pain. In previous declines, about 30 percent of stocks move up while the majority moves down. This time, there was nowhere to hide with 98 percent of stocks moving down. Since last October, the S&P 500 has lost about 45 percent of its value.

What do we do next?
In previous panics, it’s been a mistake to follow emotions and sell after a crash. It’s better to take a deep breath and assess how much downside risk there is versus upside potential.

This is the 34th bear market since 1900. During that period, it is the 5th worst decline in U.S. market history. Stock prices are down to the levels they were 11 years ago. That means stock prices don’t currently account for growth in population, advances in technology and gains in productivity of the past 11 years. Every statistical measure we use to value stocks indicates they are screaming bargains.

The average return after previous bear market declines has been 296 percent. As the market recovers, these returns usually come in bursts, which is why it is usually a mistake to sell out in the depth of a bear market.

Reasons to be hopeful
The market hit extreme lows on Oct. 10. Since that time it’s moved violently up and down but has stayed above the Oct. 10 lows. Each time the market has sold off since then it has been on low volume, which is a good sign. Also, 11 of our 12 bottom-watch signals signify we’re close to a bottom.

This sell off started as energy prices moved higher. Every time oil prices went up the stock market went down. Higher gas prices gave consumers less to spend, which was negative for the economy. The price of oil has since quietly dropped from $147 to $60. Hundreds of billions of dollars sent overseas for oil are now staying here. This savings should act as a stimulus and be positive for our economy.
The subprime lending mess also contributed to the market meltdown. It evolved into a credit crisis, which almost brought our economy to a halt. Our government throwing $700 billion worth of stimulus into the banking system will likely repair the credit mess. It will take time, but it should fix another problem that brought the market down.

The longest presidential election ever
We just endured the longest election of all time. Twenty months ago, Barack Obama began telling us how terrible things were and how important it was we elect him to change them. When he started his campaign, things were actually good and we were in the late stages of a five-year economic expansion. Even though our economy was hitting on all cylinders, he did his best to convince us otherwise. His negative spin negatively affected consumer and business confidence.

Our economy is based on confidence. If you kill that confidence, you kill the economy. Consumer confidence levels are now at an all-time low. Obama proved if you say something long enough, people will start to believe it. The good news is the election is over and his drumbeat of doom should now turn positive.

I can’t see into the future, but based on history, it appears we are bumping along a market bottom. My general recommendation is to stay invested and move your portfolio into areas of the market that historically come back the fastest when recovery begins. Keeping a long-term focus has always rewarded investors in the past.

ABOUT THE AUTHOR
After graduating from BYU, DAVE YOUNG started his career as an entrepreneur. He successfully started 12 businesses in the early 1980s. In 1986, he decided to sell his businesses and invest the proceeds, but he was unable to find an investment company that met his needs. As a result, later that year he began managing his own portfolios. Young continued researching methods for investing that would produce the most profitable returns. He believed in his methods so much that he invested his life savings and started Paragon. Over 20 years later, Young continues to invest and research ways he can improve his business to serve his clients. He has been interviewed by BusinessWeek, CNBC, the Wall Street Journal, the Deseret Morning News and other national and local media. Paragon also received the Best of State Award in Financial Services for 2008. Visit www.paragonwealth.com or call (801) 375-2500 to learn more.

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