Since its peak back at the end of April and beginning of May, the stock market has gone down 20%. Regardless if we are looking at the US stock market, Canadian or International markets, they are all in the red. During the summer, we had front pages telling us that one or another government was going to collapse under the weight of their debt. Is it the time to panic yet? If you listen to Joe-Investor, you have 6 reasons to panic right now… but I think you still have 1 reason to invest 😉
#1 We are going into another recession
The US economy is growing as fast as a snail on Vallium. There are many people thinking that not only the US is going into a recession but the Planet entire is. Europe is going sideways and Canada depends greatly on its resources to keep its economy going. Unfortunately, there is more cloud than sun over head.
My Take: I don’t think that we will run into a recession. The economy is slow but companies are full of cash. It’s only a matter of time to see them injecting billions into the economy. For example, Coca-Cola (KO) just announced that they will spend $3G in Russia to expand their market share in emerging markets.
#2 Greece’s probability of default and its domino effect
Greece has been struggling for several years now and the picture is not getting any better. The rich still run with their money without paying taxes while the middle class is going on strike invading the streets. The austerity plans are never enough while Germany and France are starting to wonder why they finance the PIIGS. Several people fear that if Greece defaults, it will only be the beginning of a long list of defaults in other countries (Portugal, Italy, Ireland and Spain). This scenario would have a dramatic effect on European banks.
My take: As a banker myself, I can tell you that the last thing we want as a bank is a client defaulting. We will most likely sit down with him and try to find a way so he can pay his debt back. I think this is going to happen with Greece. In fact, the market bounced back late Monday afternoon after indications of some measures taken to help Greece and other countries in difficulties.
#3 Banks can’t save us this time
We usually turn around so the big and wealthy banks can save us from any debt problems. There is always a big guy ready to lend us a few billion so we can turn around and make the wheel spin again. But since 2008, this situation is far from the truth. This time, banks are not lending…
My take: while several banks are not in a position to support the market this time, I think we have a few others that might jump in and be pretty happy with the returns they will get out of this debt. If they see Government support behind the debt, they will definitely jump in.
#4 Fed & other central banks have an empty toolbox to fight back
About 2 weeks ago, The Fed announced that they will dance the Twist by selling short term bonds to buy long term bonds instead. The impact on the market was terrible; they twist, you shout! Interest rates are at the lowest level possible, the Fed injected so many billion that we can’t even count them; definitely, central banks don’t have many other tools to support the economy. When money and low interest rates are not enough to convince people to borrow, we have a serious problem.
My take: The biggest winners in this current situation are companies. People tend to forget that since 2008, several corporations are squirrelling their money like there is no tomorrow. They cut their expenses in 2008, became more productive in 2009 and racked-up serious profit since then. All the measures taken will eventually lead to growth. We just need to be more patient.
#5 China is losing its breath
High inflation (6.5% for the past 2 months!), uncontrollable growth, social problems; China is victim of its own success. We had a small growth boom in Alberta for the past 10 years and we are having problem managing it. Imagine how China can handle double digit annual growth for the past 10 years? We all fear an economic slowdown from emerging markets as they are the locomotive of the global economy. As long as the US is not picking up, we need them to support our stock market!
My take; if China is slowing down a bit, other countries can help. Countries like Russia, India and Brazil and small countries like Vietnam, Laos and Thailand are showing interesting growth rates. There is a lot of room for growth in all of these countries and the growth won’t be linear!
#6 Even gold is going down – there is no place to hide anymore!
In September, gold lost 20% of its value… in 3 weeks! How crazy is that? Markets tumble and so does gold… what are we going to do with our money if bonds are not paying interest, stock markets are depressed and gold is even worse? I’m digging a hole in my mattress tonight!
My take: Come on! Are you serious? You are surprised that gold could take a hit? There has been so much speculation on the yellow metal that a drop of 20% is just normal. People tend to forget that not so long ago, an ounce of gold was only worth $900.
BUT! Because, there is always a “BUT”
I’m telling you upfront that I would leave you with one reason to keep investing. As you can see, while the problems are real and it will take time to solve them, there is no real reason to panic (there is never a good reason to panic anyways!). The reason why you should keep investing is simple:
The market goes up and the market goes down. But in the end, the market always goes higher and it falls.
Companies are making profits and it is only another bear market to go through before it turns into another bull market. In the meantime, grab your pillow and take a bite because the ride is not going to be smooth. But please, stop preaching self-fulfilling prophecies! You are better off subscribe to my newsletter and download my free ebook about dividend investing instead 😉
Investors panicking while corporations are increasing their financial health is a bright green flashing “buy!” signal as far as I am concerned.
Right on – this is the BEST time to be buying! My logic – even the Great Depression ended.
Seriously? We have been in a recession and will continue to be in a recession. The “recession technically ended” chatter was manipulated by reckless government spending and the usual under-reporting.
Unemployment: Check out shadowstats.com for the actual unemployment rate stuck at 23% since 2009 and on the verge climb higher.
US Banking: According to the FDIC, there are currently 1,000 “problem banks” in the US (372B in assets) that are insolvent on the brink of failure (actually these banks should be shut down already). In 2005 there was just 50 (6B). Our most prominent banks such as Bank of America, Wells Fargo, BBT, USB, and PNC all are leveraged and still have significantly more debt on the books than assets.
Housing: Shadow inventory is mounting and we likely won’t see housing bottom until much later this decade. The bait that was the housing tax credit has worn off.
National Debt: That’s pretty obvious considering the % of GDP and the devaluation of the USD. Gold: Has skyrocketed because many of the world’s most prominent fiat currencies are doomed.
Can you point me to some positive signs? Have you seen the VIX?
I’m still buying at these prices. Certain corporations are growing, certain corporations are trading at attractive valuations, and those that look to the short term rather than the long term provide good opportunities for those that look at the long term to invest now.
The Fed not only has an empty toolbox, but a total lack of credibility. Business and consumers drive the economy, not the economists. The world governments need to check their egos and realize this. The longer they act like they are saving the economy, the longer we will all suffer from their folly.
“Government is not the solution to your problems, government is the problem.”
– Ronald Reagan
@Bryan,
This is exactly when people are freaking out that it is the best moment to invest! There are not that many positive sign at the moment, but there is one major fact:
Major companies are sitting on a pile of cash. This liquidity is enough to go through any kind of recession and it is also the best weapon for them to act quickly if they see an opportunity. this is why I think it’s the right time to invest.
@Bret,
this is the best quote I’ve read for a long time. You are right; Govs have a lot of problems… not corporations!
You say “recession,” I say “sale.” Times like this are times when wealth is transferred from one group to another — hopefully, from people with more money to people like me. I’ve already picked up a bunch of ETFs and I bought a 3-unit apartment building in a short sale. I’m on a recessionary shopping spree.
@Paula,
Right on! this is exactly why I’ve borrowed 10K to invest in the market. So far, it has been a pretty good move already!
From my experience, in every recession there will be an opp chance to invest. And the best investment in this situation is in retail market or end costumer related business specially in daily need supply.