Market Outlook

The market appears to have finally reached a bottom – at least temporarily.  The wild ups and downs of the past few weeks may be a bit unsettling, but at least we are having some ups mixed in with the downs.  That is an improvement.  A month ago, we were seeing nothing but down, down, down in the market.  We have to accept improvement wherever we can find it.

I mentioned the bottom may be temporary.  The reason for this is that the creative destruction that is called capitalism still has some more destruction to do.  Real estate has not yet bottomed, so its continued decline will drag other markets down with it.  As I mentioned about three months ago in this newsletter, the government must devise an entity like the old Resolution Trust Corporation to move its many foreclosed properties back into private ownership, and no one is even talking about that idea at this point. 

Until we see this happen and that inventory of property moves back into private ownership, we won’t have hit bottom in the real estate market.  And real estate and its related industries are a huge part of the economy.  When real estate sneezes, the economy catches cold.

But the stock market never goes in a straight line for very long.  June’s decline made it the worst June in stock market history, and the first few weeks of July weren’t much better.  We are just due for a decent bounce, and it appears to be beginning. 

How long will the stock market rally last?  I’m thinking weeks to months, but not indefinitely.  Any meaningful conclusion about the market environment is best drawn from the relationship of the up legs and the down legs of the market movement.  Right now I am considering that we are in a down market until I see prolonged up moves, so we must wait and see what develops.

Successful investors are patient investors.   

There is Always a Bull Market in Something

I had a discussion recently with a real estate investor who had trouble seeing the wisdom of keeping a lot of cash on hand when money market rates are 1% or 2%.

I pointed out to this man that he was focusing on the wrong thing.  The 2% money market rate, at least is positive, when so many investments, even oil and gold lately are losing money.  But even that is not the main point.

The real value of money is not the number of dollars you have, but what you can buy with them.  Economists refer to a change in purchasing power as the “real return” of an investment.  Inflation can affect purchasing power in a negative way, but asset deflation – falling prices of stocks and real estate – affect it positively.

If you think about a money market fund that went from $100,000 to $102,000 over the past year that is just counting dollars, and does not reflect purchasing power. 

When you realize that today’s $102,000 in cash can buy stocks that would have cost $130,000 a year ago or real estate that cost $150,000 two years ago, you then can appreciate the real value of the cash holdings.

Now when someone tells you “cash is king” in declining markets, you will know what they mean – and it isn’t the interest you can earn.