The Sky Isn’t Falling
By DeDe Jones, CPA, CFP
By now you are probably buried by information bombarding you by all media regarding the current crisis in the investment and credit markets. And most of that information focuses on the very negative aspects of the events that are currently occurring. Believe it or not and there are reasons to be cheerful about the global economy and the state of the investment markets. You may think I’m being a bit Pollyanna but in the words of Warren Buffett “be fearful when others are greedy, and greedy only when others are fearful.” Right now there’s fear enough to go around, so let’s examine some of the cheerful things that we can consider during this time of incredible turmoil:
- The stock markets are already pricing in an awful lot of bad news. The stock market, by its very nature, is designed to incorporate new information quickly and that means when we’re all still sitting around feeling sad, frustrated and fearful about what’s happening, the markets are already moving on.
- In times like we are currently experiencing, demand declines for everything, including risky assets such as investments. That means prices need to adjust relative to the risk and it makes these kinds of investments even more attractive to investors. Lower share prices compared to fundamentals means expected returns rise.
- There is unprecedented coordination seen by governments in the U.S., Europe, the UK and Australia as they invest in their banking systems and move to get credit flowing again. The effects of this coordination are already being felt.
- At the same time, central banks are moving in a coordinated fashion to reduce interest rates. Reduced interest rates result in lower borrowing costs, and this will facilitate business and consumer activity supporting the underlying economies of the world.
- Some governments are already moving toward fiscal stimulus plans. A stimulus package may be in our future, depending on our political climate.
- Oil prices, which until recently were seen as a major threat to global growth, have come down significantly. As I write this, crude oil futures have fallen by 50% from a record $147 a barrel in late July.
- Research shows that the average duration of bear markets in the U.S., from the end of 1965 until the middle of this year, was about 14 months. The bear market we are currently experiencing has lasted just about a year now. While that doesn’t mean we are at the end, it does mean that the longer it goes on the closer we are to the next bull market.
- Remember that someone is buying! It is important to remember that on the other side of the trades of all those people liquidating their portfolios and mutual funds are other investors. Sure, some are market timers but many others see this as a long-term buying opportunity.
- Unless you sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to happen very quickly. All you need to do to capture those recoveries is to stay in your seat.
- The sun will come up tomorrow. Worrying over a market downturn is understandable. There have been crises before and we have recovered. The world moves on.
- So what does this mean for you? What are you going to do? I hope you will answer yourself with the following: “I will limit my consumption of news, remembering that there are big differences between data, information, knowledge, and wisdom. When I feel fearful, I will seek out facts and not allow myself to be swayed by emotionally loaded words and phrases used by the media and public figures.”