Well, that was a rough month. The Dow Jones Industrial Average lost 6.4% in August, its worst August in 17 years. So if you’re an investor you’re probably ready to call an early end to summer.
Whenever there’s a steep selloff, it’s natural to wonder when it will end. And Jeffrey Saut, chief investment strategist at Raymond James did that on Aug. 21, stating that the market was getting close to bottom.
One can hope he’s right, and to be fair, Saut was doing more than hoping for a market bottom. He backed up his thesis with a close technical analysis. There are also plenty of other fundamental signs of a strengthening economy, from rising housing prices in many markets to a falling unemployment rate and strong corporate earnings.
A Common Blunder
But here’s another thing that’s very common among Wall Street and Main Street investors alike: To call an end to a correction before it’s really over, or worse, to see the initial plunge as a blip rather than the start of a bear market. Unless we’ve shorted the market, we all prefer to see stocks go up. This positive thinking has often led even the most astute market analysts to miss major corrections.
Now, to be perfectly clear: I am not saying we’re headed toward a bear market or even that we should expect more steep declines as we head into fall. I’m not sure.
But I do think that while there are some good reasons to think the market was only taking a breather, there are also a number of factors that could point to more rocky times ahead. Interest rates have remained low for far longer than anyone imagined five years ago, an apparent signal that the Fed still lacks confidence in a robust economy. And while the unemployment rate suggests a strong labor market, that suggestion is somewhat undermined by related stats like stagnant wages and low labor force participation.
We’ve also enjoyed a long and robust bull market for several years now and we all know that these wild runs eventually end.
The Big Picture
Even with the declines we saw in August the Dow is still a little more than double the trough of February 2009. If you look at the big picture, August wasn’t really all that bad. All but the newest investors should still be ahead.
But can we expect the rally to continue? Maybe and maybe not. Saut has a very bullish outlook that sees stocks rising much higher over the next decade. He could be right, but even if he is, that scenario does not rule out more short-term declines.
If this all sounds very uncertain, it’s also very honest. What we know about the stock market is that it goes up and down in a pattern that relates to economic trends but doesn’t necessarily track them. In other words even if it were possible to read all the mixed economic stats with clarity, you’d be challenged to predict the exact timing of rallies and corrections.
But here’s another uncertainty that actually makes for some really good news. We know that over time markets have consistently moved higher. For retail investors who are investing for their retirements, their children’s educations and other long-term goals – unless they need the money in the near term – the best thing they can do is carefully select their investments and then hold on for the ride. It won’t be a straight upward course but chances are excellent that over time their investments will grow.
How to sleep easy at night
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