Good afternoon,
Just a few quick insights as we move into the afternoon, which recently has been predictably filled with loss. The Market Beat blog of the WSJ has cited an interesting phenomenon. According to the study, the Dow fell about 28% from April 1 through October 17. But if you only took the move in the final hour of each day, the Dow was down 13%. So nearly half the recent losses have occurred in the final hour.
The same may hold true today if we are truly reaching for a bottom. How do you know a bottom is upon you ? Well, there’s no where to hide. The Dow is down, the S&P500 is down, the Nasdaq is down. Commodities are down – even oil despite the fact that OPEC has said they are going to cut production today. Diversification is the tool of many practitioners and its theoretical purpose is to provide non-correlated investments. Not only does this not work at a bottom but it also doesn’t work at the top. When the bottom is near, everything is down. When the top is near, everything is up.
Why invest in America? I will go ahead and warn for some patriotism in the next couple of sentences but I also believe it provides a cogent argument for why we will come out ahead. Caveat: I love America. I also love to travel and have a great appreciation for many countries and cultures around the globe – at last count I had been to 28 countries on 4 continents.
Who came to America? Dissatisfied Brits. Who continues to come to America? People who are dissatisfied with the opportunities their own countries present. The rest of the world seemingly likes the status quo. Americans like to break through the status quo. Take the most recent market correction. The status quo of capitalism no longer worked for America so democracy (i.e. the government) stepped in and is working on improving the current situation. We are a culture of innovation and performance (the proof is in the pudding!) and we will continue to be. I believe it was Margaret Thatcher who said, “America eventually does the right thing after she’s tried everything else.” Right now we’re working on the right thing.
The stock market is a discounting mechanism, as such it will be the first to rally and the first to make the most back. Other classes like Real Estate, treasuries, bonds will make their comeback but not with the same gusto or volume as the stock market.
Lastly, stock market corrections return stocks to their rightful owners. If this afternoon you’re not a rightful owner there will be someone who is.
Sources: WSJ-Online, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 24, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
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