Historically, the long-term investor has come out ahead.
Well, it was one of those days … the Dow Jones Industrial Average dropped 362 points to kick off November, one day after an interest rate cut and a rally. How to explain the about face the markets took at the start of the month? You may be wondering …
- Why the sudden reversal?
- Will it happen again, or will the Dow advance again back to 14,000?
- Is it time for an attitude adjustment?
It is a good time to address those questions.
Why the 180°? You can chalk it up to three factors: a gut punch to two big banking giants, evidence of a slowing economy, and the reality of no more interest rate cuts in the near future.
Citigroup shares lost 7% on the day after a CIBC World Markets analyst downgraded the rating of the company’s stock to “sector underperformer,” citing a shortage of available capital and pressure to cut dividends to raise capital. CIBC also forecast a drop in revenue for Bank of America, which was also downgraded. This was the long arm of the credit crisis, reaching out yet again to trouble Wall Street. Exxon Mobil, Credit Suisse, Ford and Sprint Nextel all issued disappointing earnings reports, and Chrysler said it would lay off up to 12,000 employees in the next 15 months.
Beyond that news, some disconcerting economic reports came out. On Halloween, you had a preliminary 3Q GDP reading of 3.9%, a huge sign of strength. But a day later, we learned that consumer spending rose by 0.3% in September – slightly below expectations, and the smallest increase in three months. The Institute for Supply Management, the trade group that measures manufacturing growth, calculated a below-average reading of 50.9 on its manufacturing index – the lowest level of growth in seven months.
And finally, we have interest rates. The federal funds rate is at 4.5% now, and the consensus among Wall Street analysts and economists is that the Fed is done cutting rates for the year. Some maverick analysts actually believe (or maybe just hope) that there will be another cut by January, but they comprise a very small minority.
Will it happen again, or will things improve? Let’s face it … no one can predict the future, not even the near future. As much as we’d like to be clairvoyant, we don’t know what the next week or month will bring for investors. We do know that the October unemployment report comes out Friday, and it may provoke a strong reaction from the markets.) Record oil prices and uncertainty about Iran’s nuclear program and tensions on the Turkey-Iraq border may make the markets very unstable for the short term. But even with the ups and downs of this year, Wall Street still retains a bullish, opportunistic mindset. Investors in Europe and Asian markets, while concerned about the U.S., share the optimism, as global economic growth has been very impressive in recent years.
Is it time for an attitude adjustment? You know, the media tends to encourage investors to think in either/or terms – bull or bear, rally or slump. Euphoria or panic. I would urge you to look beyond all that. Keep your eye on your long-range financial objectives, not the latest headline. There will always be another “latest headline”, and if you base your investment strategy on the headlines, the chances are you will end up confused and astray from the principles that you are building wealth with.
The markets have bad days. But historically, the long-term investor has come out ahead. The mood is still essentially bullish. Look at how well the markets have done on the year. We’ve had tumultuous headline after tumultuous headline, and the major indexes are still up between 6.3%-16% for 2007.1 That’s a great argument for persistence and patience. Hang in there. We’ll get through this latest storm and see some sunshine again.
Documentation. 1 http://www.usatoday.com/money/default.htm, 11/1/07.