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Is
This a Good Time to Buy Stocks? By Jodye Deal Article published in The Network Journal magazine
This all changed on
September 11, 2001. Since the terrorist attacks in New York and Washington, DC, that
killed thousands of people and triggered what will likely be a long war on terrorism, some
of the biggest moves in the stock market have been driven by strong emotions.
From around the end
of September, the Dow Jones Industrial Average is down about 25 percent from its high, but
it still has more than tripled since the start of the last bull market that began in
October 1990. And even though the Nasdaq Composite Index has fallen 70 percent, it
is up 355 percent in that period. The market’s
reaction is purely psychological. There is no logical reason for stocks to sell when
crises hit. In fact, the shocking nature of a major event often makes rational
thought more difficult.
In fact, after every
major crisis in the past century, including the bombing of Pearl Harbor, the Cuban missile
crisis and the assassination of President John F. Kennedy, the Dow Jones industrial
average sold off sharply at first. After eleven such
crises, the Dow rebounded and gained, on average, 33 percent in the next year and 52
percent two years later. Some analysts expect
an upturn in the market by next year. When examined, all postwar bear markets found
the average length to be about 12 months with an average decline of 29 percent. As
of the end of September, the current bear market has lasted 18 months with a decline of
about 37 percent. In addition,
consumer sentiment bounced back a bit as the nation began to adjust to the after-affects
of the terrorist attacks. The University of Michigan’s consumer-sentiment index
rose to 83.4 in mid-October from 81.8 at the end of September and well above the low of 72
recorded in one week late in September. And, at its October
meeting, the Fed cut its federal-funds target rate a half percentage point to 2.5 percent
and indicated it was more inclined to cut interest rates than to leave them alone.
Since Alan Greenspan has been Fed chairman, 25 out of 29 times they’ve followed up on
and lowered rates.
The irony is that,
when the market rebounds as it always does, those who sold while stocks were on the way
down will likely lose out when stocks recover. If you have a
long-term view of the market, this is one of the best buying opportunities we will see for
years to come. If you don’t believe that, take a look at any stock market chart
showing the past sixty years. Severe market retreats, which make everybody so
anxious, look like tiny blips in an upward-spiraling market. What should
investors do who want to go against the grain? With the aforementioned evidence, some
analysts are positive about stocks. There is something to be said for moving against
the crowd. When investors are risk adverse and running for cover, the crowd is
clearly opposed to taking risks. That means the rewards lie not in avoiding risk but
in taking it on. It makes a lot more sense to buy stocks now that it did a year and
a half ago, when no one seemed to have any doubts at all and companies were bursting with
confidence and promising astonishing earnings growth. Stocks seemed like a no-lose
proposition then.
This article was published in The Network Journal. Jodye Deal, contributed this article for the New York-based magazine. If you have questions on investing, please send them to Investing@GazelleAssociates.com. |
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These events have impacted
the markets in such a way that investors are running scared rather than making prudent
investment decisions. Investors are feeling that now is the time for cash.
Cash means moving investments to money market funds, certificates of deposits, passbook
accounts, or for that matter, under mattresses. They are adamant right now about
avoiding risk and that risk aversion creates investment opportunities for savvy
investors. 
Whenever there is a traumatic event happening in society there is a tendency
to see certain reactions, such as depression, irritability, and confused thinking.
In that context, rational decision-making becomes very difficult. People tend to
begin to let their thought processes be guided by their anxieties. Instead of
focusing on the historical resiliency of the stock market and the economy, investors
choose to focus on short-term problems.
Frightened investors shorten their time horizon dramatically when
investing. Some investors will sell because they see their portfolio crumble and
they fear they will have nothing left. It’s not rational, but it does happen.
So, is this
a good time to buy stocks? It’s a main topic of discussion on a number of
market-related shows in every financial media outlet. For savvy investors,
there is no time like the present. 
One approach to investing in the market under these current
conditions, would be dollar-cost averaging into stocks that you already own, or a stock
market index for more diversification. The point is, if you are a long-term investor
the stock market will recover. The prices of solid companies that have shown
consistent earnings in the past are looking like great buys at current levels. Sound
appealing? Consult your investment professional, do your research and start bargain
hunting.