Thursday, February 19, 2009

Why the Market is a Mess

Well, the stock market had another bad day... the Dow Jones broke its previous low. However, don't worry about the Dow Jones, instead focus on the S&P 500. The Dow Jones is a broken index. The stocks in it are supposed to represent the US economy, but battered stocks like GM and Alcoa don't represent the type of economy we have right now. For instance, the United States is moving away from being a major car manufacturer. Therefore, a stock like GM shouldn't be in an index that is supposed to be representative of the major industries in the US economy.  The S&P 500 does a much better job of taking into account America's largest industries and thus is much more representative of the United States economy. Uninformed investors follow the Dow Jones while informed investors follow the S&P 500. It hasn't dipped below its lows yet; it's still testing them. 

So why is the market doing so badly right now? The market is fearful that recent government action won't effective enough to fix the problems in the economy. The biggest drag on the market today, as usual, was the banks, including an over 10 percent drop for Bank of America. Obama's mortgage plan received mixed reviews. Investors were pleased with the details, they just aren't sure how well it is going to work; hence, we saw a flat trading day. Before we can see any sustained rally, we need to see a planned solution for the financial sector. The major problem with the banks right now is that we don't know how much their toxic assets are worth. Tim Geithner is working on a plan to get this issue resolved. Once we have the details of his plan, I think we'll see a positive move in the market. Until there is a solution for the banks, don't expect any sustained rally - get used to the market testing the lows.

If you have investments at the moment, don't panic. Be patient. Government action will have an effect; we just have to wait until we have all the details on how the banking sector will be fixed. For now, don't be surprised when we keep having these negative moves in the market. It's just investors who are fearful of the government's action.

3 comments:

  1. VC,

    Now that the S&P has broken down to new lows, what is your outlook?

    My opinion of government intervention is different from yours as well. I don't know what impact the stimulus will have on the economy one, two, or ten years down the line, but right now it seems like every time Obama or Geithner opens his mouth, stocks tick down.

    It's really remarkable how the market reacts. When I notice a press conference goes on, I watch the market and how it reacts. It's never been a good reaction going back to October.

    Adam

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  2. I completely agree with you, every time the market thinks Obama or Geithner is going to say something, it completely tanks. Investors think Obama is "attacking" certain sectors which is why you say big pharma stocks take a huge hit when he released his budget plan. I still think government intervention will be good for the economy in the long run, but I agree with you in thinking that the best think the government can do for the short term is to just stop talking.

    Even though the market has broken its lows, it did it in such a short time period that I feel it has overshot and hopefully we can expect some kind of rally if we don't get anymore bad news... But keep in mind we have unemployment numbers coming out this week and Buffet saying the economy is going to remain in shambles won't help too much.

    Having said all that, I think for the first half of 2009 we are going to go through this roller coaster in the market where we keep testing/breaking lows. I expect some more stability in the second half and stocks to regain their losses somewhat, but not a major rally.

    I am buying stocks right now, I know that they may go down some more in the short term, but they are fairly discounted right now and I know they will go up within a year. I also recommend picking some high dividend stocks because that way if they do go down some more, at least you get some income from them. I only recommend investing right now if you know you won't need the money and you will be alright if it dips some in the 1st half. I am very optimistic about the future, and once the market pushes through the mess we are in right now, we'll huge returns as stocks rebound.

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