Stock prices are falling sharply around the world today and as usual, observers are trying to identify news items to explain why. Consumer confidence is down, unemployment claims are up, Europe's banks are shaky, and global economic growth forecasts are coming down. What is new in all of this?
I've long maintained that market participants decide to buy or sell and then rationalize their decisions by selecting from various items for support. It does not work the other way around.
Seizing the latest bit of economic news to trigger investment decisions bemuses me. In an economy with a labor force of more than 150 million people, is it significant that the latest week's initial unemployment claims rose by 9,000? That amounts to 0.006% of the labor force. How accurate can that number be? To me, it suggests an unwarranted precision (like that of many economic statistics).
Corporate earnings projections are clearly too high, and companies that miss analysts' estimates will likely continue to take hits to their share prices. But there are a number of companies whose stocks sell for about ten times current earnings with strong cash flows and attractive dividend yields. For income-oriented investors in particular, I recommend accumulating such equities instead of developed-country government debt for long-term total returns.
There are, however, strategic versus tactical investment decisions. I think it is a time to emphasize tactical decisions because I think the longstanding strategic adage of "buy and hold" is dead.
I expect a long period of sharp swings in stock prices with only a modest net gain overall for a number of years. As with the Japanese stock market of the 1990's, there could well be a series of 20-40% gains and losses. So set disciplined purchase prices and be willing to sell if unanticipated sharp gains occur.
S & P 500: 1143