Sunday, July 29, 2007

Were the stock market declines last week a big deal or not?

Should we be concerned by the stock market declines last week? Short answer: Probably not. It is not uncommon in a bull market for the market to occasionally go through "a correction" before continuing upwards, and during a correction people will drag out all manner of anxieties and excuses for why the market "should" go down. By all appearances, that is what we saw last week. But even if that was the case, it doesn't mean that the "bloodletting" is over yet. Corrections can last for days, weeks, or even a couple of months.

As far as the impact of the ongoing slowdown in housing, simply note that back in December non-residential construction exceeded residential construction and since February nonresidential has been growing faster than residential has been skrinking. In other words, housing is no longer a net drag on the economy.

As far as a claim of "contagion" and a "credit crunch" due to problems with subprime mortage-backed securities, note that high-yield bonds and debt for mega leveraged buyouts (e.g., Chrysler) are absolutely not respresentative of the "real" economy. Plenty of credit is available for both consumers and businesses with at least semi-decent credit. According to Freddie Mac, mortgage rates actually dipped a little last week. The fact that some dubious, riskly deals are running into trouble is probably a good sign as far as the health of the financial system.

Some of the market declines may have been an adjustment for the fact that Q3 and Q4 will very likely see slower economic growth than Q2, but the down-shift in growth will most likely not be so big a deal at all. In fact, I strongly suspect that Q3 and Q4 will be a lot stronger than people are currently forecasting or worried about. My guess is that Q3 will come in within the 2.5% to 3.0% range, and Q4 in the 2.75% to 3.25% range. My suspicion is that housing will bottom out fairly soon, with either July or August as the bottom and September and October seeing a little bit of a bounce.

The problem is that a lot of people, including many so-called "professionals" on Wall Street, really don't have a handle on the real economy and let their imaginations and anxieties run away with themselves. Reality tends to turn out a lot better than the forecasts and worries of the doom and gloom crowd.

These dips are rather painful, but on the other hand there are a lot of people like me who are net buyers of stock (and I will be for the next five years), so these dips work out to our financial advantage.

My Roth 401K retirement plan will be buying stock (automatically, twice a month) on Tuesday, so the nice dip will likely at least be a good deal for me. In fact, I'll be annoyed if the markets bounce before Wednesday.

-- Jack Krupansky

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