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It’s the question everyone is asking about the market, and the economy. Unfortunately, people are looking in all the wrong places. They are watching television, reading the paper, listening to our new president or any number of very smart people that are regularly seen in the press. People are looking for the magic bullet that will fire off a signal that says everything is “Okay.”
Bottoms rarely occur in this fashion. Market and economic bottoms are not an event, but a process. More importantly, like every process they will take time. Sometimes the bottom will take longer, sometime it has to go deeper, but the market and the economy will get better. The economy always has, and always will go through cycles of boom and bust so we might as well learn from each one.
What does a market bottom look like?
One of the key reasons that markets decline is a loss of confidence, so part of the process is to restore confidence.
A veteran portfolio manager once told me, “Confidence will return when prices begin to rise. Markets will not fall forever or go to zero; they will fall until buyers see enough value that they begin to buy again. When buyers return, prices will rise.” That was in 2002. We had been through a painful three year decline in the stock market, and we were all looking for a bottom. His assessment may seem so obvious that it sounds silly, but this is how bottoms are formed whether you are talking about stocks, houses, land, cars, or any other asset.
Stocks represent a paper or intangible asset, so it’s simpler to explain the process using a tangible asset such as a new car. Let’s say buyers see that new vehicles originally priced at $30,000 are being discounted to $26,000, then $24,000, and even $22,000. Although they know they can purchase new cars for a very good price, they may decide to wait and see if the price goes to $20,000.
If, instead of continuing to go down, the price goes back up to $24,000, buyers will believe that prices are starting to rise and will probably decide to buy before they go any higher. The buyers will come back, and prices will begin to rise again. That new car will not go to zero. For it to be worth zero, every used car would have to be worth less, which will not occur.
Stocks, houses and land will never go to zero either. The prices will find a level that attracts buyers, then prices will begin to rise again. This is the process; it just takes time.
Where are we at in this process?
We know that prices have already fallen dramatically, so we are not at the beginning. The government will not fix all our problems, but it has taken major steps to improve the situation. These actions will take time to have an impact, but we are already starting to see the benefits of lower interest rates as qualified home-owners are refinancing their mortgages. Another positive; consumer fear has Americans paying down debt rather than raising debt. It may not help the economy immediately, but it is a good long-term decision.
What else should you be doing?
Do not hide. Look at your statements. Review your expenses. Make sure you have savings that can last you at least six months or longer. That cash reserve becomes more crucial than ever, because it will give you more patience and the time to ride out this cycle. Remember – this is part of an economic cycle and I believe better days are ahead.
Many of us feel we have lost some of the future that we had planned for – retirement, education, a second home, or a dream vacation. The best way to deal with these disappointments is to begin looking for and planning a new future. These events may have changed our lives, but in time I believe it will get better.
Paul R. Attwater III is a Financial Advisor at Smith Barney, a division and service mark of Citigroup Global Markets Inc. Member SIPC. The views expressed herein are those of the author and do not necessarily reflect the views of Smith Barney or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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