How does the world go from rosy to totally gloomy in 60 days? The truth is that the world’s economies were not totally rosy 60 days ago—and they’re not totally gloomy today.
Late in July the stock market took a sudden downturn, the Dow Jones Industrial Average falling from the year’s high of 9337 on July 17 its low of 7530 on Aug. 31. In fact, Aug. 31 the index dropped 512 points, the second largest one-day decline this decade. By Sept. 11 the DJIA was within 2 percentage points of a “bear” market, defined as a 20 percent drop within 52 weeks.
In the past two months there have been numerous up and down point swings. Back-to-back days of large losses have been followed by large gains. Nine of the DJIA’s 10 biggest point gains occurred in 1997 and 1998.
I have been in the investment advisory business since 1981, and this is the most volatile time I can recall. “Irrational volatility” comes to mind. Investor confidence has been shaken.
Corrections historically occur in September and October. Oct. 19, for example, was the 11th anniversary of 1987’s Black Monday.
In somewhat of a surprise, the Federal Reserve cut two key short-term interest rates Oct. 15 to counter a crisis-driven credit squeeze and stave off recession. It was the second cut in a little over two weeks. The rate cuts were the confidence booster the market needed. The DJIA surged 331 points, its third biggest one-day point gain ever. For the week, the Dow gained 500 points, the largest five-day gain ever, and soared nearly 1,000 points in little more than a week. The benchmark 30-year U.S. Treasury bond also soared, ending the week at 4.96.
What happened last month is a harbinger of lower mortgage rates.
U.S. markets could test the low points created in August and early September, but I am of the opinion that the bottom has been reached for now.
That’s because even though Japan remains one of the true sources of the worldwide economic slowdown, banking reform appears to be moving forward in its upper house of parliament.
Here, the markets are focusing on capital and credit concerns in the rest of Asia and Latin America, particularly Brazil. Upcoming Y2K fears and the Long Term Capital Hedge Fund bailout—despite two Nobel prize winners at its helm—add to the worry.
While the U.S. economy shows more strength than the rest of the world’s, we are affected by problems outside our borders. Economists and stock analysts have already reduced growth and earnings projections for sectors, regions and individual stocks.
Our economy will continue to grow, but slower, which I consider healthy.
At some point, with long-term bonds yielding below 5 percent, individuals and money managers will increase equity asset allocations.
Stick with your asset allocation plan—401(k) and 403(b) investments. Invest in stocks via mutual funds. Dollar cost averaging—putting in a fixed dollar amount every month—lowers average price per share.
Mortgage rates are good and may go even lower. The Federal Reserve meets Nov.17, with another rate cut possible. This is a great time to purchase a house or refinance. A 15-year fixed rate mortgage substantially reduces cost compared to a 30-year.
Assess taxable gains/losses for 1998. The technical corrections bill reduced the 20 percent long-term capital gain holding period to 12 months. I believe large company stocks will out-perform small company stocks for the near term. Healthcare and pharmaceuticals, technology and financial services will do well. This may be a good time to take some losses if you hold small company stocks.
Boomers will continue to drive the market. It is a world-wide phenomenon—except in Japan. That’s one reason Japan is having problems today.
Complete Roth IRA Conversion this year for favorable tax treatment. The value of your account is lower now than it was in July, and if converted in 1998, taxes are spread over four years.
Index funds and managed funds should be part of your portfolio even though index funds have outperformed many actively managed funds. Both should be part of your portfolio.
International or foreign mutual funds have moved with U.S. markets the last several years, so they may not provide diversification.
Do not try to time the markets. Accept that corrections occur. Do not let news reports scare you.
Harry Dent, author of “The Roaring 2000s,” was in town recently for a financial exposition. He advises paying more attention to the spending habits of the Baby Boom generation than the comments of Alan Greenspan or the stock market downturn. His forecast is for a rising market—between 21,000 and as high as 35,000—over the next 10 years.
By Dorothy A. Lewis, MA, a certified financial planner and registered investment adviser withj Financial Insights.