The process of finding a bottom during a correction is always ugly: big market moves in both directions, hard-won gains wiped out in a flash, individual stocks moving 10% or more in a day (or an hour), and of course, irrational fear all around. (Fear, by the way, is always irrational.) Investors, being human, just want to get out and seek shelter until the storm passes. But this would be a mistake.
- As I said in my prior newsletter, today looks a lot like 1998, including the pattern of the decline and the worries used to justify it (sovereign debt issues and an economic slowdown). The 1998 correction lasted 4 months from the time the decline began until the market recovered all of its losses. This one appears to be moving even faster.
- Economic data do not point to a new recession, and only 1/3 of stock market declines are followed by a recession. Thus, even with the market’s recent slide, the chances of a “double dip” are only 33%.
- Bear markets typically start when investor sentiment is at least moderately optimistic. When was the last time that was true? (Hint: 2007.)
- Corporate earnings continue to rise faster than expectations and are at all-time highs. In addition, corporations hold record levels of cash (earning almost nothing) that they will eventually need to spend.
- In March of 2009 I wrote an article that said stocks were as cheap as at previous major market lows. Using the same methodology, I now find that stocks just as undervalued as they were then, even if we have a recession. If there’s no recession, stocks are cheap beyond belief. (You can find the original report here: http://www.kenfieldcapital.com/blog/investor-education/. Let me know if you’d like the details of my updated analysis.
- Lastly, this is not 2008 in so many ways. The banks are better capitalized. Hedge funds and other big investors are far less leveraged. Corporations are better prepared to whether a slowdown. The credit markets are functioning normally. There are no bubbles waiting to burst. The list goes on.