Dear ,
On Thursday, May 6, 2010, the stock market, as measured by
the S&P 500, expanded its recent pullback with a vengeance as it dropped over
3% for the day after rallying from midday declines of almost 10%. While fear was certainly the undertone for
the day, the big declines and subsequent rally happened all within an
hour. Although the point damage was
largely mitigated, uncertainty and concern remain entrenched in the market.
While the catalyst for the large decline was attributed to an
apparent trading error that triggered a technical selloff, it was the uncertain
environment regarding the fiscal crisis of several countries in Southern Europe
that has created the negative backdrop for the market. Concern over the bailout
of Greece has been widely reported, but the emerging anxiety of the market is the
potential contagion of Greece's fiscal deficit issues to other European
countries and perhaps beyond. The very
real concern is if Europe will once again teeter back into the realm of
recession, which could have negative impacts to the export portion of U.S.
multi-national companies, certainly has the equity markets nervous.
While the fiscal crisis of Greece and other Southern
European countries creates market uncertainty, it is important to remember that
the events are the after-effects of the 2008 financial crisis and not the start
of a new financial crisis. Greece is not
alone-it is one of many companies, families, individuals and now even countries
that have been causalities of the recent recession. Whether it was a job loss, a home foreclosure,
rising debt, the need to cut back on spending or a national fiscal crisis as it
is for Greece, there have been many negative consequences resulting from the
most severe recession in almost 80 years. That said, these negative events are the effects of the financial crisis
we have just been through and not the cause of another new wave of credit
concerns and another financial market collapse.
While fear is always an unwelcomed emotion, in investing
fear may create opportunity. Since the
recovery began back in early March 2009, the S&P 500 has risen
approximately 70%, but not in a straight line. In fact, along the ascent, there have been four pullbacks ranging from
5% to 10%, including this most recent market selloff. I would argue that the selloff is not the
result of increasing bad news, but rather the market became priced for
perfection and perfection was unrealistic. After huge market gains over the last year, expectations grew greater
and greater. The bar continued to be
raised until the point where, regardless of how strong the economic backdrop
was, expectations were greater than reality. The result was a reset in expectations and a pullback in the market.
Greece happened to be the catalyst, but the trigger could have been any report
or event that did not meet the market's expectations of near perfection. The fact remains that pullbacks, like the one
we are currently in the midst of, are healthy as they serve to reset
expectations and re-engage nervous, profit-taking bulls back into a recovery.
When wondering how to react to times like these from an
investment perspective, let's not forget the fact that the market plunged on
what appears to be a trading error and then corrected itself all within an
hour. This indicates a market
demonstrating stability, not in a freefall. This does not mean we will not get pullbacks and market hiccups like we
are experiencing now, as these are both needed to establish a balance between
buyers and sellers and to support future, healthy market advances.
Sometimes in periods of fear, investors and the market
itself can lose the forest through the trees. While the fiscal problem in Greece, the Goldman Sachs testimony
discussions with Congress, and concerns arising from a global tightening of
monetary policy have stolen much of the headlines as of late, a full view of
the "forest" would show that the overall economy continues to improve. One piece of evidence was released today (May
7, 2010) in the April 2010 employment report. The U.S. economy lost a total of 8.4 million jobs since the start of the
recession highlighted by 22 consecutive months of job losses, but we have added
jobs in 5 of the last 6 months to the tune of 528,000 new jobs. In the end, the economic backdrop is on the
mend.
The bottom line is that there is a big difference between a
pullback and a financial crisis. And
there is an even bigger difference between how the market reacts to events that
cause a crisis (Bear Stearns, Lehman Brothers, and the credit crisis of 2008)
and those events that are the aftershocks of a severe recession, like the
situation unfolding in Greece and Southern Europe. There is also a difference between the two
definitions of risk: danger and opportunity. We would argue that the latter is far more likely than the former at
these levels in the market and at this stage of the market recovery.
With a little patience, the commitment to a well thought out
investment plan and a willingness to follow Warren Buffet's sage advice to "be
greedy when others are fearful and fearful when others are greedy" could result
in turning the tone of this market pullback from danger to opportunity. The selloff we are experiencing, which is the
fourth one since the market bottom of March 2009, serves as a reset of market
expectations. It could provide the next
springboard for the market to rally to higher levels over the coming months
before running into the growing headwinds of rising rates, contested mid-term
elections, and tougher year-over-year earnings comparisons for companies later
in the year. For now, the market is in the midst of a good, old-fashioned
pullback and this is not the start of a financial crisis. As such, we feel that the mending economic
backdrop supports cautious opportunistic investing at these levels in the
markets. As always, if you have
questions, I encourage you to contact me.
Best regards,
Steve
Van Houten, CFP®Lifetime Financial Advisors, Inc.
Registered Principal, LPL Financial | CA Insurance Lic# 0613686
Lou
Oberman, RFCLifetime Financial Advisors, Inc.
LPL Financial Consultant | CA Insurance Lic#
0393733
227 N. El Camino Real Ste. 201Encinitas, CA 92024760.943.0430
760.943.0950
faxwww.lfa-inc.comSecurities offered through LPL Financial Member FINRA/SIPC
