By Ted Olshansky
Publish Date: June 1, 2008
In our March letter we stated our bullishness and advised our readers not to look at today’s news when making investment decisions. The news we have seen the last few months is the reason the Dow dropped from 14,000 in October to 11,800 five months later. Oil at $130, gold at 1,000 per ounce, housing declines, retail sales heading downward, food prices headed up, upticks in inflation and a weak dollar. All of the above may give you the idea to sell all your stocks and even your house (if you can). But don’t!!
Take a look at stocks in general. With the exception of financials the market hasn’t done too badly. For the year the S&P and Dow are down about 5% and the NASDAQ about 6%.
Why is the market holding up in light of all the negative news? All of the above has contributed to a steep decline in consumer confidence. But, before you sell everything, note what Kopin Tan reports in Barron’s, The Trader “Each time [after these declines in consumer confidence] the stock market has rallied soon after, with the Standard & Poor’s 500 index producing average returns of 15% six months later and 23% a year after, according to JP Morgan.” (page M3, June 2, 2008)
It is this writer’s opinion that the housing crisis, while still having to go through some tough times, has probably seen the worst. Also, oil generally peaks at this time of year and we all would welcome (and may get) a respite from these very high prices. If you haven’t noticed, gold is down about 12% from its highs and for those chartists, you will see a very bearish pattern of lower highs and lower lows.
There is no doubt that in the short term oil is the major focus of the market. The bears case is that high oil prices bring on inflation and economic problems. While more negative news continues to pummel the market it seems that the information has been digested and stocks held up very well.
The Fed has been very accommodative to investors. It is faced with a dilemma. Do they continue the cuts and help the housing industry and further weaken the dollar and fuel inflation or do they stop the cuts and put inflation fighting on the front burner? This writer thinks the latter is the best case scenario when the Fed meets June 25th. This is because while the government reports inflation being at slightly over 2% not including food and energy, consumers know they are getting killed across the board from food to airline tickets. The real rate (the rate we feel) is much higher than the government’s numbers.
Stocks are holding their ground. The market often climbs a Wall of Worry. Stay long, stay diversified and know the correct percentage of your assets which belong in equities.
Bernard Baruch, astute investor and sage, was asked “How did you make so much money in the markets?” he responded “I sold too early.”