Market Turmoil

Reprinted with permission from World Finance Net IPO Newsletter, written by Alexander Frauenfeld

Remember the 7% NASDAQ rally (two weeks ago)? That seems like an eternity ago to the average tech investor who is being tossed by the volatility in the markets these days. Add to the equity markets' instability the Federal Reserve's constant threat of rising interest rates. And throw in the flood of economic news and earnings reports that are keeping investors on their toes. Being active in todays equity markets definitely requires strong nerves. Recent days have seen record ups and downs in the U.S. stock market. This kind of volatility has many investors asking: "What do I do now?

The answer is relatively simple: staying the course is the best way to deal with these days of extreme volatility. Of course, one's ability to stick it out is obviously closely connected to the confidence one has in their investments. Now is the time to make sure you really believe in what you own. Stocks remain a very viable form of wealth-generation. Recent market volatility will have little impact on the investors ability to reach long-term financial goals. While past performance does not guarantee future results, it seems that investors should take lessons from history here and continue to stay calm.

Despite some opinions to the contrary, the events of recent days do not compare to the 20% drop that US stock markets suffered back in October 1987. Recovering from that correction took years, not the hours or days we have seen of late. When large-scale selling pushed both the DOW and NASDAQ down more than 500 points (4.5% and 13.6% respectively) at midday on April 4, both indices bounced back by the day's close, buoyed by purchases by large investors. In fact, some investors may have been waiting for a market decline to add to their stock holdings. Amid the volatility, some influential analysts even revised their general asset-allocation strategies, increasing equity allocations from 55% to 60%, and decreasing cash from 10% to 5%. While recommending a decrease in stock allocation, Abby Joseph Cohen, the chief market strategist at Goldman Sachs and long-time market bull, still recommends that investors remain 65% invested in stocks.

Over the long term, 5 years, 10 years, and 20 years, US stock gains have outpaced other investment vehicles by a substantial margin. Shares represent ownership in companies. And this ownership means shareholders can participate in the creation of value not only for themselves, but also for the economy at large, as companies develop new products, open new markets, add more jobs and improve productivity. Factors like interest-rate increases tend to have a relatively small impact for long-term investors. (Speculation over a 25 basis point hike on May 16, the next FOMC meeting, has turned into quiet resolve, and a hike has probably been factored into the markets already.)

Despite the angst on Wall Street, the investing world is not about to end. We most likely will continue to test the bottom of the correction, as the flood of very strong predicted earnings reports keeps a positive perspective on things. Financial and other interest rate sensitive stocks will have a rough couple of weeks, but it will be far from disastrous. Real companies have always survived times of poverty and will continue to do so.

Making complete sense of the markets has always been a difficult task. That holds doubly true at times like these. A general drifting of the markets, with some continued downward pressure, is probably the best outlook at this point in time. Remember though, whatever your investing decisions, you should keep the long-term in mind. Occasional market corrections are a normal expression of market forces.

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