There are more than a dozen reasons to throw in the towel. The financial system has descended into complete chaos. The bursting of the housing bubble has left a record 10% of homeowners "upside-down" on their properties. And 50 years of American materialism has come back to bite us on the proverbial rear-end.
(That was just 3 reasons that many are currently citing. I could have mentioned layoffs, recession, inflation, stagflation, gasoline prices, falling U.S. dollar and the contentious U.S. election.)
I mean let's face it. The Great Depression was a walk in the park. Compared to what's coming down the pike... some "thinkers" are declaring the end to everything we've ever known or ever seen.
Personally, I believe the doomsday prognosticators are very sad people. Being right... which is an INfrequent occurrence for the doomsday crowd... is a pursuit that yields them fleeting moments of happiness.
Fear, anxiety, pessimism and anger are the emotions that embolden these folks to say, "See, I told you so." And it all occurs under the guise of a "realistic" point of view.
What is realistic, then? For starters, the S&P 500 SPDR (SPY) is down roughly 19% from its October 2007 highs.
It's bad. It's bearish. But it hardly qualifies as apocalyptic.
Recession-based bear markets are a natural part of investing cycles. More often than not, stock assets begin falling precipitously long before recessions start and they recover dramatically long before recessions finish. (They tend to start climbing at the mid-point of a recession.)
In my humble opinion, stocks could fall from 19%-27% in total. This is the average for recession-based bears... and I have no reason to believe that it'll be worse.
But why exactly should we believe the doom-n-gloomers who believe that stocks will be worth 1/2 what they were at the October 2007 peak? Because this is the worst economy/worst catastrophe/worst country?
Traditional valuation of company stock strongly supports the notion that the asset class is quite cheap. Granted, valuations don't mean much when fear is in the driver's seat. Nevertheless, it is important to distinguish the 2000-2002 stock market bubble (the S&P 500 SPDR (SPY) did fall 50% from its March 2000 highs) from the 2007-2008 recession/credit crunch.
The glass is not completely empty in 2008. In fact, it may actually be half-full.
For example, while the media focus incessantly on the recession, nearly all of the prominent economists polled in the Wall Street Journal concurred that the recession would be mild. That directly contradicts the idea that we're heading for a "depression" to rival the days of our grandparents.
What's more, the Federal Reserve Board is aggressively easing interest rates. While the negative effects it is having on the U.S. dollar are well-documented, the near-term reality of relief to consumers and small businesses can not be ignored. Rate cuts do not work for up to 9 months, but they do get into the system, and they do provide for attractive borrowing prospects.
It doesn't stop there. Federal government fiscal stimulus is coming in tax rebates. Moreover, bailouts of some kind will likely be afforded to some homeowners as well as financial companies. U.S exports are surging because of the weak dollar. Agriculture is expanding rapidly. And while, housing and auto may be contracting, the other 90% of the U.S. economy is still expanding.
What's the famous line from the movies? "What we have here is a failure to communicate." Simply put, troubles are being amplified tenfold, whereas positive news is being disregarded.
Of course, that's the nature of fear. And that's why the markets are struggling as badly as they are. But opportunists from Warren Buffett to institutional money managers do not stay sidelined for long. They know... we all know... that it is hugely rewarding to "get a little greedy when everyone else is fearful."
Wanna know when it's going to get better? Keep an eye on the Dow Jones Transports Fund (IYT). This is the breakout barometer that I will be watching closely.
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