Are Investors Beginning to Regain Confidence?
A Brief Synopsis of the Financial Situation
As the stock market soared throughout the 90's, no one could have imagined the Great-Depression-like financial trauma the market has suffered in the past few years. Beginning with the burst of the housing bubble, followed by a loss of over 40% in the S&P 500 (which many investors use to gauge the overall health of the market) and finally the bailouts which devastated the deficit. So in this great abundance of market misery, there's no reason to fault investors for bailing out of this no-win situation. Many people who bought stocks during the housing bubble simply bought high and later sold low when the market hit bottom; likely out of fear and preservation of capital. There were debates on television of whether the market would keep going lower. One anchorman made the point that theoretically, it could go to zero. At the time the Dow Jones Industrial Average was a mere 7700 points.
Finally Some Good Financial News
After the market crash, many disillusioned investors put their money into savings accounts and certificates of deposit (cds), which earned less than half of a percent. However, in recent months, investors that have been sitting on the sidelines have regrouped and entered the maket yet again. The S&P 500 made around a 40% recovery from March through May. The Nasdaq recently had it's longest positive gains streak since 1992. It seems that as more people reenter the market, stock prices go up and investor confidence remains on the upswing. Although the Consumer Confidence Index made a nice recovery from March through May, it is slightly lower in June, partially due to the bleak job outlook.
What this Means for Investors
What we have seen in this financial crisis is a reminder of the risks we take each time we enter a new investment position. Without some risk, there is little potential for return. Be careful when investing to always consider the big picture at hand and the overall state of the market, as well as the economy and not just the underlying company. Often times a view of an investment, whether it be a stock, bond, option, etc., becomes myopic and distorted, thus excluding the outside externalities. Blue chip stocks often have great financials and receive praise from analysts, but this is only a microview. Always take into consideration the economic conditions and the market forecasts. Even Microsoft suffered a 34% decline in revenue since last year. There are different stages in the economic cycle which include contraction (recessions and depressions) and economic growth and recovery. I believe we are currently entering into the recovery phase, which is an excellent time to return to the market. Many people made their fortunes after entering the market during the economic recovery after the Great Depression. We have hit rock bottom and seen the dramatic consequences and now is the time to take advantage of a buyer's market and regain what was lost.