Dividend Investing Ideas Center
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I’m about to make a disgusting analogy, so if you are easily put off, jump ahead to the section below titled “Action Steps”.
For those still with me, I’d like to compare the current market situation to those awful times when you feel sick to your stomach. First, you sense that something is amiss. Then, you realize what’s happening and what inevitably will occur. While you hope against hope that the storm might pass, the moment suddenly arrives and you make a mad dash for the bathroom and…why go further?
That post-hurl feeling of wooziness, achiness, chills, and the dread that something may seriously be wrong is precisely what investors are feeling right now after the stock market’s sickening 8.96% drop from the close of trading on Wednesday, August 19, through Monday, August 24, as measured by the Standard & Poor’s 500 Index — which is now 11% below its May 21 peak.
Monday’s trading started off with another head-in-the-toilet loss of about 1,000 points on the Dow, but the averages slowly stopped convulsing through the day, coming up and then going down, ending with a loss of 3.58% on the Dow and 3.95% on the S&P. The Nasdaq was off 3.83%.
In the wake of this market purge, there’s no need to remind you of what the financial punderati have been telling you to do: sit tight. That’s good advice, since markets usually do bounce back after steep declines, and missing those irrationally exuberant days of 300- or 500-point gains is just as harmful as enduring days of 300-point losses.
On the other hand, talk of the economy being “fundamentally sound” despite the market’s unpleasantness reminds me all too much of poor President Herbert Hoover’s happy talk in 1930 as the country slipped into Depression.
The truth is, nobody knows what will happen in the markets or the economy. Until a somewhat more settling picture emerges, however, I have a hunch the Fed will hold off raising rates in September, especially if China and emerging markets continue to show signs of distress. The last thing Janet Yellen wants to be remembered for is triggering a Depression (And you know what’s scariest about that thought? If a rate rise from a nearly invisible 0.25% to a merely infinitesimal 0.5% is enough to cause a worldwide economic cataclysm, we are indeed in serious trouble).
As far as what else is coming, I see little reason to believe that a strong stock market or vigorous economic growth is on the horizon. The stock market was too expensive before these recent convulsions and it’s still too pricey now. It’s been propped up by buy-backs because corporations can’t figure out how to grow profits per share other than by reducing the number of shares. Invest in plants and new products? That’s way too risky for today’s pseudo-capitalist CEOs.
Given this backdrop and weaker demand from China, we’re likely to see a rise in stock market volatility, with more days of 300- or 500- or 800-point drops, as well as days when some glimmer of good news sets off a buying stampede. The economy also is likely to limp along, helped by cheap energy and cheap money, even if rates do creep up.
Given my choppy market forecast and my dull as dishwater economic forecast, what should you do? If you’re like me and are risk averse, cheap, value oriented and prone to inertia, here’s what I’d do (and am doing) over the next several days and weeks:
Sure, a stock market crash feels terrible. But we’ve survived them before and we’ll survive this one too.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net