The stock markets’ recent 1,000 point slide is a good time to stop and ask some critical questions
By Kevin M
Let’s get one thing out of the way right up front: I am NOT an investment expert!
Now that that’s been declared for the record, let’s mush on.
After bottoming at 6600 in March of 2009, then rocketing to the 11,000 level in just over one year, the Dow Jones Industrial Average has given up 1,000 points in a space of only a few weeks. What does that mean? Does it mean anything at all? It seems we may be at a crossroads.
There are two schools of thought on where the stock market is heading, and the implications of either are of no small consequence where our personal finances are concerned. If we firmly believe the market will rise, we need to position ourselves for maximum gain when it does. If we think it will slide—or even crash—it’s incumbent upon us to arrange our assets in such a way as to minimize or even eliminate losses.
Are we about to break out of the 10,000 level on the Dow, and if so, which way is it more likely to swing?
The optimistic view
The higher Dow position isn’t hard to find in the news these days. Some of the common arguments supporting this view include:
- The housing and mortgage meltdowns seem to have hit bottom.
- Interest rates are at all time lows.
- Gross domestic product (GDP) is growing.
- The unemployment rate, though still hovering around 10%, has stabilized.
- The bank panic has subsided.
- Corporate profits are on the upswing.
- The dollar is showing strength, especially against the Euro.
- Even with the recent slide, the market is still up 50% over its 2009 bottom.
- The business cycle appears to be moving from recession to growth.
If the business cycle is alive and well, it’s clear we’ve turned a page in the past couple of quarters, and predictions of a higher market are well within the realm of credibility.
The pessimistic view
It would be tempting to discount entirely the possibility of a crash, relegating it to the realm of manufactured hysteria, except for the reality that it’s happened twice in the past ten years.
An article this week appearing on Yahoo! Finance provides a summary of the pessimist’s view of where the markets are heading in Warning: Crash Dead Ahead. Sell. Get Liquid. Now. (MarketWatch, 5/25/2010) that lists compelling reasons why the markets are headed for their third crash in the very young new millennium, including:
- The financial system remains unstable, and measures taken to date have fixed nothing.
- Government debt is increasing to unsustainable levels, locally and globally.
- There’s still a substantial amount of excess, high risk debt.
- Despite statistical improvement, the real economy remains fundamentally weak.
- Another shock could tip the apple cart—confidence in the system is near the verge of collapse.
Other reasons are given, and curiously it doesn’t mention the European financial crisis that now seems to be coming to a head.
The tone of the article calls not for a correction or even a prolonged bear market, but a full blown crash, worse than anything experienced thus far and leading to major problems that will move well beyond Wall Street.
Forget the experts—what do you think?
For a moment, let’s forget about what the “experts” think and say; after all, no one has a crystal ball. So, what do you think will happen?
Here are some questions to get you started…
1. Which way do you think the market is headed?
2. Where do you think it will be one year from now?
3. Given all of the admittedly bad news in the background, what do you think will drive the market higher?
4. What percentage of a person’s portfolio do you believe should be in stocks right now?
5. What sectors do you think will do especially well? Which do you think should be avoided?
6. Do you think the 21st Century’s Crash No. 3 is imminent?
7. If you believe the markets are heading down in a major way, where should we be putting our money now?
8. Given that it’s happened twice in the past ten years, is it possible that stock market crashes have become the “new normal”?
Pick any question or group of questions you feel qualified to answer or, if you feel really ambitious, tackle them all. This is an exchange of ideas, so there are no right or wrong answers here.
Also check out this related post by John D. Buerger, CFP, Flash Crash. But be sure to come back and weigh in with your comments!