Recent Stock Market Movement

As I expected, the drop of over 1000 points from the DJIA recently has pushed the DOW near 10,000 once again and not unexpectedly, we have a little bounce above 10,000 today as bargain hunters look for opportunities.  With another big drop yesterday, I received a call from my sister asking what I thought about the recent downturn.  My response was that she shouldn’t be concerned about day to day movements IF she has her portfolio positioned to represent her risk tolerance.  That’s what I have done and I can go about my daily life without fretting about what the stock market is doing because I have a plan.  Do you have a plan?  Do you understand what has been happening in the markets the past few years?  If not, read and learn and get the help of a competent professional if you are uncertain or afraid.  There is always risk in investing, but there is also risk in not investing.

The best thing you can do to sleep better at night is understand the amount of risk you are taking to achieve the return you desire.  Risk tolerance changes for most people over time, so look at when you need the money you are investing.  Remember to think about your money in at least three time frames - short term (up to 2 years), midterm (2-10 year needs), and long term (10 years or more) so you have a plan for the future and can still take advantage of growth to meet your goals.  You do have goals, don’t you?

I’m a trend analyst.  Not by formal training, but by nature.  Trends help me try to make sense of the universe.  I really must be a math geek because I am always looking for patterns.  I guess that’s why stock trading appeals to me.  As the DJIA hovers around 11,000, my curiosity peaked and I decided to take a random, or not so random, walk through recent history.  A lot of people follow the S&P, but I like the DOW.  It’s a microcosm that tells us about America.  I use the S&P and Nasdaq to verify what I think I’m seeing.

RECENT HISTORY

So what did my walk tell me?  That being in the market and investing regularly is a good thing.  I’ve mentioned before how the market went sideways through the 1970s but people still made money.  They did it by continuing to invest smartly.  As I get close to retirement I have tempered my usual aggressive self somewhat, but if you still have 20 or 30 years to invest before starting to withdraw assets, you may find my trend analysis interesting.  Even you old boomer farts (like me) might want to follow along.

A SIDEWAYS TREND

We have been in a sideways trend between 10,000 and 11,000 for the past 6 months.  That is the longest sideways run since 2007 when the DJIA moved sideways in a 1000 point range for 9 months.  It will be interesting to see if we break 11,000 and move up or meet resistance for awhile.  After hearing my analysis, you decide what you think will happen.  Starting in April, 1999 the DOW hit 10,000 and didn’t look back until the market bobbles in 2001 and 2002, in effect a 3 year run before a major change occurred.  Then in May, 2002 the market started a slide to around 7500.  Recovery was quick - 10 months of hand wringing until the market started up in March, 2003 and was once again above 10,000 in December, 2003.  People who kept buying (that would be me) were happy and had a nice double digit increase in 2003.  The DOW stayed in a range between 10,000 and 11,000 when it once again started rising in February, 2006.  At that point the market kept going up and up for 20 months until the DJIA was over 14,000 in October, 2007.  It was a lofty year for stocks and real estate alike.  But then things started to change.  After such a heady rise for over 4 years, it was hard to appreciate that the end was near in October, 2007.  The DOW stair stepped it’s way down to 13,000 and dropped to around 11,000.  It was a confusing market.  The average 401k investor couldn’t tell if it was building resistance or support. (Check the recommended reading list if these are foreign terms.)  Hindsight tells us it was definitely resistance.

In August, 2008 the party came to a crashing end with a 3 1/2 month long freefall that caused people to start crying “depression”.  Those who had ignored everything occurring in the economy were blindsided and lost 40-50 percent of their investments.  A 28% drop occurred during those 3 1/2 months with another 16% decrease until the DJIA hit bottom in March, 2009.  With the mortgage debacle that was happening, bonds weren’t sacred either.  The chase for higher bond yields in funds put these investments at risk.  An interesting aside is that market volume started rising above 2 Billion shares in September 2005 and continued to rise until it hovered mostly above 5 Billion shares from August, 2008 until June, 2009.  Volume still is hovering over 4 Billion shares, double the rate in 2005.  Who is buying and who is selling?

THE GLOBAL ECONOMY

So now we’re touching 11,000 on the DOW.  We’ve been above 10,000 since November, 2009.  The real estate market appears to be recovering.  But where are the jobs?  Where will they come from?  The banks are sitting on their impressive returns after TARP money was handed out, but businesses need capital to grow.  Without business growth there is no job growth.  The government doesn’t produce anything so all the “stimulus” activity is just blowing sand until business owners start feeling confident enough to start letting go of the purse strings.  I don’t see that happening in the real estate market yet.  Realtors are conserving cash because they know (those that educate themselves) there is another wave of foreclosures coming that will affect real estate prices until 2013.  Arms are resetting.  One of every 6 mortgages is in default and 1 in 4 mortgages is underwater.  There is phantom inventory sitting in bankers’ portfolios and there are phantom short sales overhanging the market because some delinquent loans haven’t been foreclosed on….yet.  But does that all mean you should pull out of the market and hunker down for the long haul?  Everyone has to check their gut to see how they feel about that.  I’ve pulled back more than I normally do, but I have a short timeframe before I need to tap into my money.

For people with a long view, this market offers buying opportunities that are appealing for both stock based investments and real estate.  We could have a long sideways market.  We could see the market slip again if a lot of bad news hits the presses.  My gut is telling me that we’re not going to see any long sustained increases in the stock market or in real estate prices anytime soon.  Only time will tell me if I’m right.  The DOW is still 22.5% lower than at the height of the market in 2007.  We’ve been over 14,000 before and we’ll probably get there again.  We just don’t know when that will happen.  We not only are affected by what happens in the US but by what happens worldwide.  China owns a lot of treasury bonds.  The EU is having issues with Greece and trying to decide when/if to step in to protect the euro.  The EU is like a mini US now and they have to play nice with each other to hold things together.  It will be interesting to see what financially solid Germany does as things play out.

WHAT SHOULD I DO?

Some people are comfortable being contrarians and taking educated risks to try to take advantages of market opportunities.  Others are more comfortable pulling out, sitting back, and taking a wait and see approach.  Common sense for one person is very different for someone else.  I believe in knowledge.  The more you have, the more you can make educated decisions that feel like common sense.  So my recommendation is to read, listen, talk to people you trust, and educate yourself.  After awhile a pattern will emerge that makes sense to you so you can try to make sense of the universe.

I’ve been an investor for a long time and I’m interested in trends in the market, because we all know investing in the stock market (or real estate market) is not a short term endeavor if you want to truly be successful.  I love the charts on Yahoo and with the DJIA rising in recent weeks I wondered what the long term chart looked like for the DJIA in January of each year over the past 20 years.  I kept buying shares during the 2000-2002 downturn and made a very nice double digit return in 2003.  Is the current chart so very different?  Looking at the chart for the past 6 months is scary but here’s what I found out when I took a longer view.

At the beginning of 2003 after the previous downturn, the DJIA was at 8054.  In January 2009, the DJIA was at 8001.  Let’s look at the long term trend from 01/1989 to 01/2009:   01/89 2342, 01/90 2590, 01/91 2736, 01/92 3226, 01/93 3310, 01/94 3978, 01/95 3844, 01/96 5395, 01/97 6813, 01/98 7908, 01/99 9358, 01/00 10940, 01/01 10887, 01/02 9920, 01/03 8054, 01/04 10488, 01/05 10490, 01/06 10865, 01/07 12622, 01/08 12650, 01/09 8001.  Would you have invested over the past 20 years knowing what has happened in the past 6 months?  I sure would have.  I would have put in even more than I did!  The point a lot of people miss is that the real value of long term investing is not how rapidly the indexes rise, but how many shares you are accumulating along the way.  If you sell out near the bottom or you don’t continue to invest when the market is down you lose a lot of ground.  Buy low, sell high means buy lots more shares at low prices and reap the rewards when prices go up and you get to cash in to have money to live or achieve goals you’ve set.

Just thought you’d like to know.   If you had continued to invest and have more now than 20 years ago, do you think you’d have money to invest in historically low priced real estate too?  Something to think about.  Fear and greed drive short term movements in the markets.  A long term vision helps put it all in perspective.  If you want to know how to do it, there are a lot of good books on library shelves that can help you.  If you need help picking and sticking with an investment allocation, meet with a good experienced financial advisor to get you going.