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Market Outlook

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A bear market is no time for hasty decisions.

The recent market volatility has certainly affected the risk tolerance of investors.  There is a lot to be said for consistency of performance with a more moderate return on investments.  I am reminded daily that we are in the midst of a “bear market” and it certainly is uncomfortable. My advice is to not make hasty decisions or panic. Investment decisions should be made for the long term and with great care. Economic security is a goal many of us share.  

Market declines are natural; it is a normal part of the business cycle. It has given corporate America a chance to clean house. Companies have been working on increasing productivity and finding efficiencies that were overlooked in the economic boom of the 90’s.  Financial   statements have not been under such extensive scrutiny as they currently are; what’s wrong with that? So while the recent market decline is uncomfortable, I believe it is a healthy process that will lead to better corporate discipline and disclosure.

The big question is whether the current economic situation is really as bad as the numbers suggest. The economy seems to be reacting to both the big decline in the stock market and corporate scandals. Investors and companies seem to be “pulling back” waiting to see what happens next. This inertia is showing up in the data.  Consider that approximately 70% of the economy is related to consumer spending, 18% is related to government spending and 12% is related to corporate spending. The 2001 recession was triggered by a massive contraction in corporate spending on investment technology and capital goods while consumer and government demand remained moderately strong. Consumer spending grew at near record annualized rates over the last two years as consumers took advantage of zero percent auto financing and record low mortgage rates to buy homes. The decline in the stock market has now instilled some deep fears into the largest consumer demographic segment, the baby-boomers.  They appear to be momentarily deferring new purchases while rethinking retirement planning options.  Continuation of this trend is the wild card in the equation. We suspect it will take restored confidence in the financial markets to re-ignite baby-boomer discretionary spending. Another significant drop in the stock market (which I don’t expect) will probably cause this group to reduce their demand for vacation housing, cars and related durable goods. Government spending, always increasing, but moderating at the state and local level, will probably offset some of the decline in consumer spending as the nation carries out a very expensive war. The decline in corporate spending bottomed out in March, but did not materially increase during the June quarter. Companies appear now to be modestly rebuilding inventories, anticipating increased demand.

The possibility of continued economic recovery is still good, although it might not grow as quickly as many of us would like to see. If upward revisions in the jobs and broader economic gains are made, investors will regain some sense of confidence that the economy will slide through this current rough spot and regain some momentum as corporate leaders begin to focus on the “business of business” instead of making sure that their accounting data meets the new severe tests of historical accuracy.  

History has shown us that once investors have suffered this much pain, subsequent stock returns have, and should be, very rewarding.  Amid all this gloom, the market and the economic data looks good to me. Of course, I believe strongly in building a diversified portfolio of quality investments with strong fundamentals and a good track record. Now is not the time to be foolish but to be very conservative and invest with a strict discipline.

I would like to end my article with a quote from Frank T. Williams, a great stock trader of the early 20th century.  He said, “The market is most dangerous when it looks best; it is most inviting when it looks worst.”  

Nancy Hadley is an investment representative with D.A. Davidson.

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Nancy Hadley

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stock market, investments, bear market

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