toe in the water?–five days later, on the weekend

where we find ourselves

The S&P 500 has recovered from its intraday low of 1106 on last Tuesday afternoon to close at 1179 on Friday.  Trading will resume in Asia at 8PM eastern time, with very little more clarity about the global economic situation than that world stock markets appear to have stabilized for the moment.

The key question remains whether the market weakness we’ve seen over the past several weeks indicates the US and the EU are in the early states of a significant economic downturn that will last, say, a year.  If so, and if past patterns of market performance hold true (I don’t see why they wouldn’t, then:

–we’ve only seen about half the decline we are likely to, and

–it will be some time in early 2012 before we can expect markets to begin to anticipate cyclical strength.

While this scenario may play out, I don’t regard it as the most likely outcome.  My guess is that we have a period–maybe a long period–where the US and the EU simply go sideways economically. Developed workd stock markets would probably follow suit.

“Sideways” would actually be a dynamic concept, however:

–the financial and housing/construction sectors would continue to oscillate around zero as they continue to heal from the excesses of the last decade;

–export-oriented/import-competing industries, as well as those in the forefront of technological change (in other words, those not dependent on overall domestic GDP growth) would advance steadily.

what to think about/do

1.  Last week has given all of us–as if we needed another one–a reason to think about our risk preferences.  All of us should ask whether we’re comfortable with our asset allocation.  If stocks were to decline by 15% from Friday’s level over the next six months, would we be content to ride through the storm with our current portfolios?

2.  Does the low of last Tuesday mark a significant market bottom– a defining event, as it were?  I don’t think so; I think of recent trading as a ratcheting down of markets that are absorbing the fact that a long period of US government support for equities is over.  Stocks have to make it on their own from now on.  That’s actually a healthy development, in my opinion, although it is a cause for near-term worry.

Significance?  If I’m wrong, and Tuesday was a significant bottom, stocks will likely rise for a month or six weeks and then return to “test” the bottom.  I have no idea why this happens, it just always does.

3.  Look at relative outperformers/underperformers from Tuesday on.  Start with your own portfolio.  Call up a Yahoo chart and compare the performance of your stocks with the S&P during Wednesday-Friday.  Keep doing this over the next few days.  The process will hopefully let you see what the sectoral direction of the market is.  It may also give you ideas about how to rearrange the names in your portfolio.

4.  Go shopping.  There may be stocks you’ve always wanted to own but have thought they were too expensive.  As a result, you’ve bought weaker companies that were trading at more reasonable prices.  Now may be your chance to trade up.


2 responses

  1. I like the idea of going shopping for stocks that I’ve wanted for awhile, but some of them (like AAPL or GOOG) are still very pricey, especially if (like me) you don’t have the resources to buy a round lot (currently around $37,699 and $56,377 respectively). Do you have any thoughts on why companies like AAPL and GOOG don’t do a stock split? I know at least AAPL has done this before.


    • Thanks for your comments. Two points:
      Back in the day, buying an odd lot (less than a round lot) cost more and was harder to trade. But that’s not true any more. A discount broker like Fidelity will charge you the same commission–usually under $10–whether you buy 1 share of GOOG or 10,000. And the trade is just as easy to do. There is something psychological, though, that keeps people looking to buy only round lots.

      I wrote something on stock splits a while ago, but not so cleverly didn’t tag it. Basically, I think that stock splits have no economic meaning in the US, although they do elsewhere. By catering to individual shareholders’ desire to hold round lots, doing splits shows management concern for the owners of the company.

      Whatever the reason, there is some evidence that when high-priced stocks announce an intention to split, they outperform for a while. In addition, there’s no downside I can see to splitting. My conclusion is that neither AAPL nor GOOG care that much about individual shareholders.

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