The last few weeks have been rather strange. It started with a 2% drop in the U.S. stock market on the first trading day of the month. It picked up more strangeness on the following Thursday when the market fell 10% intraday on reasons still a bit unclear. The “flash crash” they call it. It continues today with the market very weak again on, from what I can tell, is no new news.
All the talk of Europe’s problems and the threat of contagion is, in my view, besides the point. From what I can tell, investors are selling mostly because they want to sell. It’s as if all the economic progress made from the first part of 2009 was all smoke and mirrors. Some people may actually believe that – that all the improvement was built on the back of government stimulus that will soon end, spinning us into another recession.
As if on cue, all the doom and gloom gurus, who have been quietly absent from the media’s attention for the last year, are now once again proudly on display, explaining exactly how fragile the situation is, and enumerating all the fun and exciting ways it can become much, much worse. I know these seem like hard times, but allow me to provide some perspective.
1) Corporate America is doing fine. U.S. companies have the best balance sheets in decades. They are sitting on record amounts of cash. Revenues, profits and cash flow have all surpassed expectations for five consecutive quarters.
2) Low interest rates are a boon for much of the economy. The Fed appears committed to keeping rates low for a long time yet. This helps the car companies, the banks, the housing industry and reduces expenses for every borrower. It also makes stocks look more attractive relative to bonds.
3) Stocks are on sale. It’s funny how consumers love anything on sale except stocks. As the market falls, I begin to see great bargains on many of my favorite companies. Even if investors have no new cash to invest, these lower prices can allow them to swap into very attractive stocks at cheap levels.
4) Positives and negatives always co-exist. Even when the market was rising, the problems the market seems so concerned about right now were there. Never is it the case that only positives or only negatives exist. Investors are always trying to figure out which forces have the greater influence. Right now the negatives are winning. Yet, scores of positive factors exist; they are just being ignored by the market.
5) The worst case scenario never happens. My worst case view? North Korean launches nuclear missiles (you doubted they had them??) into Seoul and Tokyo. Seizing on the mayhem this causes, China invades Russia with 100 million troops. Responding to this threat, Russia fire off its nukes – unfortunately they are still targeting the U.S. President Obama, channeling Martin Sheen in “The Dead Zone” fires off our nukes into the heart of Germany, because, well, we’ve beat them twice before. Anything less than this, I think the market can handle. Seriously, the stock market has been able to absorb the worst global credit crisis in a generation. It bounced back from that. The current fear is unlikely to spread to another crisis of similar magnitude. Even if it does, it seems logical to me that the market could again rebound from that .
In all reality, I don’t feel fine. Every day the market shows this kind of volatility affects me in a harsh way. Yet, I have enough training and experience to know that these days, too, will pass and the market will once again focus on the positives and ignore the negatives. Until then, I will continue my search for value and seize upon it when I see it.