By Clyde Noel
Stock Report
What should investors do in this roller-coaster stock market? The future is still unpredictable and the suggestion is to wait; but last week’s sudden turnaround could mean the big indexes have hit bottom for the short run.
In the last two weeks the market fell 18 percent. But after losing ground the previous nine weeks, the Dow Jones industrial average reversed itself and gained 3 percent by adding 245 points last week.
Several analysts who were holding back from recommending stocks have concluded the week’s stunning turnaround could mean the big indexes have hit the bottom. At least for the short run.
However a big caution! Anyone who approaches the stock market as a means of saving money should avoid the temptation to make sudden moves.
Reinforcing this behavior, is the fact that stocks typically lead us out of a recession while the economy follows in its wake. The problem. The economy is perking up at a 3 percent rate while stocks continue to plunge lower.
For the week, the Dow Jones industrial average rose 3%, thanks to Wednesday’s 489-point romp. The S&P 500 rose 0.6% for the week, while the Nasdaq Composite fell 4.3%.
A lot of well-known company names in Silicon Valley took another hit last week.. Many are at multi-year lows and close to being down 50 percent for the year.
Consider these current valuations: Agilent at $17.31 per share; Apple, $14.34; BEA Systems, $5.82; Cisco, $11.82; Harmonic, $1.29; Hewlett Packard, $11.66; LSI Logic, $7; Sun MicroSystems, $3.78; and Veritas at $17.60.
The current market is driving many investors to look to bonds as an alternative to stocks. But buying bonds in this market can be treacherous because bond prices move opposite to overall interest rates. Higher interest rates drive bond prices down, and vice versa.
Consider you bought a newly issued $1,000 bond paying 6 percent annual interest amounting to $60 per year. Next year the interest rate increases and now similar bonds offer 7 percent or $70 annually. If you had to sell your bond, nobody would pay you $1,000 to get $60 interest when the going rate is $70. Instead, you have to reduce your price to the point where its $60 interest payment amounts to 7 percent return, in this case $858.
Over time, stocks have proven to be a much better hedge against inflation than bonds. Although the risk premium (i.e., added return) you get for investing in stocks over fixed-income securities is expected to be more, stocks will out perform bonds over the long haul.
What put us in this mess? Auditors who became servants of managers rather than shareholders; brokers serving their own accounts rather than offering dispassionate advice to investors; bankers who put aside fiduciary duties to cut deals with investment partners; directors who were subservient to CEOs rather than vice versa; and executives who put their own short-term enrichment through stock options ahead of creating wealth for shareholders.
None of those reasons influenced the stock market crash of 1929.
