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“I’ll just wait until things calm down, then I’ll get back in the market.”
This was the refrain I heard from one investor after another from September ’08 through March ’09. Some folks who said this to me had already bailed out of the market. Others were contemplating it. And in all cases, it was based on the following assertion:
It is clearly so different this time – so much worse, so much more dire – that any fool with eyeballs can see it. And it would be complete insanity to stick around in a stock market that is clearly just, well, broken, when I can save what money I’ve got left and hide out in my money-market fund until there is some evidence that the ship has been righted.
Truly, it all seemed so logical in the emotion of the moment, when the best thing about weekends was that the stock market wasn’t open.
So today, brothers and sisters, it is my great joy to bring you good news! Almost one year to the day after the collapse of Lehman Brothers…
THINGS HAVE OFFICIALLY CALMED DOWN!
I do not base this on mere opinion. In fact, the news today was a veritable cornucopia of items that make the case, to wit:
• The widely followed Empire State Manufacturing Survey’s business conditions index came in at 18.88 in September, the highest level since late 2007, from 12.08 in August. That’s up from a low of -38.23 in March.
• Fed Chairman Ben Bernanke essentially declared the recession over in a Washington Speech.
• The Libor-OIS Spread, a gauge most experts think is the best indicator of credit-market health, returned today to 0.11, its five-year average from the period before Lehman collapsed. (For comparison’s sake, it peaked last October at 3.52)
• The CBOE VIX index of market volatility fell to 23, a level last seen before the failure of Lehman. (For comparison, it peaked at 82 last October, a level best described as “widespread panic.”)
So I think we can all agree that things look a lot better today than the dire straits that drove millions of investors from the market from September through March.
Now, though, for those who bailed out of the market, I am afraid I must also be the bearer of some bad news:
While you were waiting for things to calm down, the Dow Jones Industrial Average gained, from its March 9 low through September 14, let’s see, um…
Fifty percent.
Hold on, it gets worse: The Russell 2000 Index of small U.S. stocks gained…
Seventy-six percent.
It’s not like this took years to unfold. It took, in fact, a mere six months. Six measly months to recover what would ordinarily be a half-decade’s worth of returns. Six skinny months from what conventional wisdom told us was the brink of financial Armageddon to, “Eh, not so bad…”
Thus, while things are calmer, they sure aren’t any clearer for those who bailed out of the market and are wringing their hands trying to figure out when to get back in. In fact, for those on the sidelines, things today are a lot less clear than they were back in March.
So…what to do? If you are one of those folks who is stuck in the mud trying to decide when to get back in the market, my advice is to quit focusing on the market and start focusing on yourself. Don’t worry about where the market is today compared to where it was when you got out and where you are afraid it might be in another six months. That is the mindset that got you into this mess in the first place, and your paralysis will only increase with each passing day no matter what the market does.
Focus, instead, on what your goals are – your long-term investment objectives – and where you stand today in relation to those goals. Perhaps you find that you really don’t need as much growth to sustain you in your golden years as you once thought, in which case you needn’t plunge all of your money into the stock market anyway.
On the other hand, if you still need a healthy dose of stock exposure to achieve your goals, then…plunge away. You may be wrong in your timing – you may well get back in just in time for another downturn – but in the long run you will have removed the single biggest impediment you have to successful investing (your own emotions) and will be back in the market knowing that, sooner or later, you’ll be glad you got back in.
(And you will stay in this time…right?)
“The first wave of quarterly corporate earnings reports arrived stronger than expected, soothing investor fears of another economic crisis and helping push the Dow Jones Industrial Average to its strongest weekly gain since March. The Dow ended the week up 7.3% at 8743.94, taking just five days to recover almost all the 7.4% decline of the previous four weeks…
– E.S. Browning, Earnings Uptick Lifts Confidence, Wall Street Journal,
July 20, 2009
Ruh roh. Once again the stock market threw a surprise party and forgot to send out invitations. It can be such a pain that way.
The four weeks after the market’s spring rally peaked on June 12 were a long, slow downward slog. All the optimism seemed to have seeped out of the news reports. The experts told us that sentiment on Wall Street had (cue the kettle drums) turned negative. Economic indicators had stopped surprising us with good news. For every step the market took forward it seemed to take two back the next day. In early July the AAII Index, which measures the investment sentiment of individual investors, hit its highest bearish level since the market bottom in mid-March (let that one sink in for a minute, by the way). The rally was over, we were told. Once corporations began reporting their inevitably dismal earnings in mid-July, the only thing left to debate would be how low the market would go.
As Gilda Radner’s old SNL character “Emily Litella” would have said… “Never mind!”
As the earnings reports began streaming in, one company after another topped expectations. Simultaneously, economic indicators about the credit market and manufacturing activity began showing significantly positive signs. None of it was anticipated, but the stock market could care less. It gained back nearly all of the prior four week’s losses in just five trading sessions. If you blinked, you missed it.
This is the part about investing that escapes so, so many people. Stock market gains come quickly, massively, and unexpectedly. In fact, they often come when you expect the opposite. It is a story as old as the markets themselves. And it is why only the slimmest handful of investors ever obtain the returns that the stock market is trying so desperately to give them.
The continued upward climb in stocks in recent weeks has garnered the lion’s share of media attention. But there was something else that happened Tuesday that was little noticed and yet a very good sign that the financial markets are calming.
Hold onto your hat:
The VIX Index closed at a reading of 28.80!
Shazam!!!
Are you okay? Are you gasping for air?
“All is well,” you say. “Hat on. Air in. Why do I care about this ‘VIX Index’?”
I’m glad you asked…
The “VIX Index” is a gauge of volatility in the options market that many folks (myself included) believe is a very accurate indicator of investor fear. Historically the VIX has hovered between a range of 10 and 20 when the stock market is in a low-volatility environment. A reading of 30 or more has usually indicated “extreme volatility” in the market and has been accompanied by major world crises.
For instance, the VIX hit a record high of 45 in 1998 during the foreign currency crisis that swept Asia. It hit that same record high again in 2001 after the 9/11 terrorist attacks. It twice hit the mid-40s again the next year, during the summer of 2002, when global stock markets plunged following the frauds-turned-bankruptcies of WorldCom and Enron. Prior to the fall of 2008, those were the only four times that the VIX had crested 40 in its 18-year history, and in all four cases the stay above 40 lasted only a few days.
So, if you want to know just how wild-and-wooly things got this past fall, consider this: In mid-September, the VIX Index shot above 40 following the failure of Lehman Brothers. Only this time, it continued to climb like a rocket through the rest of the month and into October, peaking at an intraday high of 89 – eighty nine! – on October 24, 2008. All told, the VIX stayed at or above 40 for more than six months, not falling below that threshold until early April.
Now, if you are a dyed-in-the-wool contrarian, you can’t get enough of the VIX at 89. That is a great indication that investors are letting their emotions guide their investment decisions as opposed to logic and reason, and that is historically a great time to buy stocks at firesale prices.
But there is also a case to be made for too much of a good thing, so forgive me if I enjoy a little moment of glee that the VIX has fallen below the good ol’ traditional 30 reading for the first time since Lehman Brothers collapsed in September and sent a Category 11 hurricane through the global financial system.
Opportunity is nice, but it’s also nice to exhale every once in a while…
One of the notions I raised in “The 12 Investment Myths” is the fact that we are so much more attuned to the world’s problems today because of instantaneous, never-ending news transmission. Things that would have been inherently unknowable to us a century ago – like, say, the fact that 500 people in a world of 6 billion have swine flu – are now brought to our consciousness and kept there for us to worry about day and night until the media gets bored and moves on to the next potential calamity. In today’s wired world, we not only have to worry about our own problems; we have to worry about everyone else’s, too.
The sheer volume of distressing, negative information we have to process on a daily basis robs us of our sense of optimism about the future. This, in turn, makes it exceedingly difficult to be a successful investor, because investment success is about faith in the future. We have to have faith in the ingenuity of the human race to solve problems even when no answer seems present.
This thought came to mind while I was travelling over the weekend and my colleague showed me a Wall Street Journal article detailing the recent discovery of one of the world’s largest natural gas deposits in northern Louisiana. This discovery, along with several other recent finds, has turned the U.S. energy industry on its head. Here’s an excerpt:
A massive natural-gas discovery here in northern Louisiana heralds a big shift in the nation’s energy landscape. After an era of declining production, the U.S. is now swimming in natural gas.
Even conservative estimates suggest the Louisiana discovery — known as the Haynesville Shale, for the dense rock formation that contains the gas — could hold some 200 trillion cubic feet of natural gas. That’s the equivalent of 33 billion barrels of oil, or 18 years’ worth of current U.S. oil production. Some industry executives think the field could be several times that size.
Huge new fields also have been found in Texas, Arkansas and Pennsylvania. One industry-backed study estimates the U.S. has more than 2,200 trillion cubic feet of gas waiting to be pumped, enough to satisfy nearly 100 years of current U.S. natural-gas demand.
The article details how new drilling techniques in recent years have made the extraction of these gas deposits feasible, and how the energy infrastructure will now be shifting increasingly toward harnessing natural gas as a “bridge fuel” we can use as we work to wean ourselves off foreign oil dependence.
These are good things to remember as the next time we are wringing our hands over Peak Oil Theory and catastrophic predictions of $400 a barrel oil. It is also a great example of the fact that, while we all know what today’s problems are, we can’t know where the future solutions will come from – and yet, inevitably, those solutions come along. Those who let the media diminish their faith in the future, and alter their investment strategy as a result, will be the ones who really suffer.
One of the things I find amusing in our media-saturated world is the blinding speed with which phrases become catch-phrases and then become clichés. This is especially true when pundits are trying to summarize a complex concept that takes several sentences to explain and they get tired of having to do it over and over again. So they go looking for a shortcut, something in the vernacular that let’s the reader know what they mean in a few short words.
In the fall, when the financial system began to melt down and panic filled the air, the media scrambled to explain the causes to the masses. Thus did phrases like “subprime meltdown” and “toxic mortgages” suddenly become ubiquitous. I often wondered if a memo went out from the Trilateral Commission to the media that required all articles about the economic crisis to contain these two phrases.
Now, as all the pundits gather around their debate tables to predict when – or, in some gloomy corners, if – the economy will recover, we have our newest catch phrase:
“Green shoots.”
As in “there are green shoots starting to emerge from the wreckage of the economy…” or “the green shoots we have seen in the reports are false indicators…” Like tiny little blades of grass growing up through the thick mat of debris left behind in the economic meltdown. Get it?
So often have I come across this phrase in recent weeks that I finally Googled “green shoots economy” just for fun. It came back with 4,360,000 hits. Now, I realize that about 4,359,000 of these aren’t relevant, but scanning a few pages into the search confirmed that “green shoots” is now the Official Phrase of The Pending Economy Recovery. I wish there was some way for me to claim copyright on this phrase.
In the big picture, I think the fact that the dominant cliché in the financial press’s lexicon these days is now “green shoots” instead of “subprime meltdown” is a good sign in and of itself. If you were to have claimed there were some rays of hope on the horizon in October you would have been laughed out of the room. Now the discussion is at least starting to turn as to whether things are improving, not simply how bad things are.
Here are a couple of good “green shoots” stories to boost your spirits (unless you bailed out of the market in March; then you may find them depressing):
