Bargains Amid Downturns
Periodic dips in the stock market grab investors’ attention and fuel anxiety. Here’s why long-term investors should not worry, and instead see opportunity. Market downturns are times to buy good bargain stocks.
Think back to early March 2009, the low point after the crash. America was on sale. If you bought stocks then, when they were cheap, you more than doubled your money as of now.
Let’s home in on a more up-to-date trading week, the one ending Aug. 1. The Standard & Poor’s 500 index posted its worst weekly loss in two years, down 2.7%. The blue chip 30-stock Dow Jones Industrial Average declined 2.8%. After grinding ever upward for an extended period, both indexes fell below their 65-day moving average, which charts the price trend during that span, smoothing out the usual fluctuations.
Talking heads on the financial news channels offered myriad theories as to why the downdraft. A simple explanation for the fall perhaps is the most rational of all – that’s what markets do, periodically.
An average plotted on a graph manifests a series of deviations around a mean – the average performance over time. Statisticians use standard deviation to measure how much a security or index deviates from this average. A bell curve or graph may illustrate returns plus or minus the mean average return.
Looking at such a chart, you see that nothing stays above average forever. Eventually, it goes back to the average. We call that reversion to the mean. That occurred the week ending Aug. 1, a jarringly quick reversion to the average price level, while dropping below the moving average.
The biggest drop occurred on Thursday, July 31, with some continued but less selling the next day, August 1. Why? For one thing, Wall Street traders are a bit like the French. Every August in France, and other European countries, storekeepers and others close up shop and head for the beach. Big European cities are left to sweating tourists. Two years ago, this scribe was on Spain’s Costa Brava north of Barcelona and half of France was on the beach.
There is a seasonal August slump in trading activity on Wall Street as traders migrate to seaside and mountain retreats. Companies raised cash ahead of the August vacation season. Two pieces of bad news from abroad – financial woes besetting a large Portuguese bank, Banco Espírito Santo, and Argentina’s default amid its ongoing attempt to stiff some bondholders – increased concerns relative to credit markets, adding pressure to sell stocks.
Good news sometimes becomes bad news. The lightning crack that is good news for the farmer waiting for rain may appear differently to nervous sheep, igniting a rush to shelter. Positive jobs data failed to lift markets as some worried the Federal Reserve might be quicker to remove the stimulus punchbowl. Cooler heads noted that while employment data was positive, it was lower than consensus estimates, ergo the Fed may be less eager to start raising rates. Comme ci, comme ca.
One pundit called the week a “universal risk off,” meaning a global stock sell-off across the board, with no rationale relative to a specific stock, as investors moved to safer things like bonds.
That’s when professional investors see bargains. Savvy money managers love down days that offer an entry point for stocks on their buy list. As markets get frothy, managers often raise cash, waiting for selected stocks to approach a buying target, where prices make sense within a long-term growth philosophy. Meanwhile, ordinary investors adding money to their 401(k) or other investment accounts get to buy more stock at cheaper prices.
When you look at revised U.S. gross domestic product figures for the first and second quarters, it’s clear the Fed’s plan (keeping interest rates low and buying bonds) is working. Our economy is picking up and Europe is in the early stages of a recovery. Some term it a “Goldilocks economy” – not too hot, not too cool. Inflation, while rising, still is within the bounds of Fed policy, which holds 2% as the desirable level.
Forget talk about a bubble. Financial manager Northern Trust describes a bubble as “a set of financial assets at risk of meaningful loss in capital, exacerbated by leverage causing systematic harm to the financial system.” That describes housing leading into 2008. In 2014, deleveraging, a shedding of debt and a lack of lending and borrowing, continues to restrain the recovery. Overleveraging is not a problem.
Light trading volume, which amplifies both ups and downs in financial markets, is common in late summer. Take a cue from the French. As summer ebbs, make one last trip to the beach, and worry not.
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Lewis Walker, CFP, is president of Walker Capital Management LLC, Peachtree Corners, Ga. Securities and certain advisory services offered through the Strategic Financial Alliance Inc. (SFA). Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with Walker Capital Management. 770-441-2603. firstname.lastname@example.org.
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