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Is this the Same Kind of Fire?

by on May 28, 2010

Being burned so badly in 2008-09, many investors are wondering why the markets are selling off and if this is a repeat of the last big correction. No one can say for sure, but this correction doesn’t feel like the one we experienced in ‘08. Here are a few factors we are hearing that may be the cause.

1) Necessary Correction due to large run-up the last 12-months. Since the March 9th low in 2009, the S&P 500 rebounded 79% through April 23rd high close in 2010. This is a pretty significant rebound, so profit-taking or some amount of correction should happen eventually as this is a natural cycle for markets. Interesting to note, since April 23rd the S&P 500 has corrected -12% through May 26th. (Sources: Morningstar, Inc. and Wall Street Journal)

2) Global Economic & Debt Issues (Euro-zone countries). In the news as of late are the government debt problems in Greece, with the possibility of spreading into Spain, Portugal, Ireland and Italy. Remember Greece is only approximately the size of the state of Indiana. Nevertheless up to this point Europe has not convinced the investment community that they will make the tough decisions and deal constructively with their serious government debt issues. If Europe gets it’s act together, we could see the markets improve overnight.

3) Possible Global economic slow-down affecting the U.S. Economy. We now live in a Global economy as many U.S. companies (Caterpillar, Proctor & Gamble, GE, IBM, Cisco, etc.) sell some of their goods and services outside the US. If these foreign customers buy less goods and services from us, then our economy could slow down again. This is why we are starting to hear news services talk of the possibility of a “Double-Dip” Recession. Hopefully Europe’s problems won’t be “systemic” and spread, but no one knows for sure at this point in time. Outside of this, the U.S. economy is slowly improving and appears to be able to weather Europe’s problems.

4) Geo-Political Issues. From the North Korean/South Korean conflicts and the continuing Iran/Israel nuclear saga create political uncertainty which can also revamp market volatility. Plus many legislative changes coming from the White House and Congress such as Finance Reform, Healthcare Reform, talks of Cap and Trade, etc. indicate to the markets that the government is growing in both control and debt. Until these issues settle down, potentially larger government can produce some degree of uncertainty and increased market volatility.

Remember the markets hate uncertainty. When uncertainty exists, markets tend to increase in volatility and money begins to move around, increased hedging can occur, and securities can become shorted, etc. All of this makes market direction almost impossible to determine on a short-term basis. This is why advisors strongly suggest that investors not get caught up in making knee-jerk changes to short-term corrections.

Hopefully this helps explain some of the reasons we are experiencing so much continued volatility in 2010. Though we may be wrong, what we are hearing is that this should not be a repeat of the market problems we experienced in 2008. We are still hopeful and believe markets will settle down at some point, usually when we least expect it. The advice we can give is that it’s usually best for an investor to develop good, long-term investment plans that can weather the many short-term bumps in the road. Quite possibly, if an investor can’t do this, they may need to avoid non-guaranteed investments (stocks, bonds, etc.) and settle for potentially much lower returns.

In the meantime consider these positives: declining interest rates (30-year mortgages are now below 5%), cheaper gas prices, as well as zero inflation. Hopefully some short-term positives will put more money in your wallet while you wait for your portfolio to grow again.

From → 2010

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