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Earl Hines
This Too Shall Pass
It happens at rare moments in history… Bone-chilling fear becomes panic. And a “feedback loop” kicks in, which causes more panic and more selling. And the market — along with a number of super-strong companies — gets taken down in a confused frenzy.
This is exactly what has been happening on Wall Street this past week, as markets fell violently worldwide. There’s no use sugar-coating it. This past week was one of the worst market sell-offs we’ve ever seen. The DOW put in the single worst week in its history, losing an eye-popping 18%. The S&P had it’s single biggest weekly loss since 1933. The NASDAQ was down 13% and all three major indices are down 40% or more this year. The decline was precipitous, and in international markets, it was even worse.
If like most investors, you find all this frightening, you have good reason and you have plenty of company. We’re human, and it is okay to be frightened; but it’s not okay to panic and change your long term investment strategy out of fear. Billionaire investor Warren Buffet says that the secret to successful investing is to “be fearful when everyone is greedy, and be greedy when everyone is fearful.” In fact, if you’ve noticed, Warren has been pouring billions into distressed companies in the last two weeks, specifically because irrational selling is driving down prices. He’s shopping for bargains and buying when everyone is selling.
Meanwhile, we’re all waiting to see when and how that $840 Billion bail-out package Washington passed last week is going to kick in. Governments around the globe scrambled to stem the panic and restore trust in the banking system this past week. The Federal Reserve (and 13 other central banks around the world) cut interest rates. The Fed said it was going to double the size of its emergency loan program to banks and pay interest on bank reserves. It also said it would buy commercial paper. The Treasury Department announced it might buy into banks – and analysts openly wondered if it might have to rescue Morgan Stanley or Goldman Sachs. The government loan to AIG ballooned to $122.8 billion.
When panic takes over the market, every asset class gets hit. No matter where you were invested this past week or how diversified you are, you suffered. Scared investors clawed their way out of the market in shear terror, selling every asset that had value to raise cash. Even the oil and gold advocates lost ground, and the recent commodity bubble has now almost completely deflated. In fact, oil prices fell to their lowest level in 13 months Friday, settling at $77.70 a barrel on the NYMEX. Retail gas prices (regular unleaded) averaged $3.35 per gallon Friday, according to the AAA. Last Wednesday, the Energy Department reported a 5.3% year over-year decline in consumer demand for gasoline.
There was good news, however. Pending home sales were up 7.4%. Economists had expected a 1.8% drop for August, so the latest data from the National Association of Realtors was a nice surprise. It may simply reflect the summer’s drop in home prices rather than sparks of recovery, but any signal that we may be nearing a bottom in housing is welcome. In addition, the dollar has resurged in strength against foreign currencies as a result of the flight to US treasuries and cash.
What’s Next?
We all wish we could predict market tops and market bottoms, but no one can. We do know that after violent down-swings in bear-markets, we eventually rebound. Most economists now agree that we’re in a recession, something most of us realized some time ago. The real question is, how long will it last? Analysts that we trust vary and their estimates range from a mild recession, ending in 2009, to a long recession, ending in 2010, or even 2011. If the recession is short, we can expect stocks to recover by early to mid 2009 in anticipation.
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