People who know much more than I do about markets are all telling us not to panic. The American stock market has been in a rather vicious decline—not as bad as in other parts of the world, but still-- and many people are telling us to hang in there..
Some savvy market participants have been advising the cold light of reason. Don’t be irrational and sell every stock you have. Others have been looking for great buying opportunities. Now you can buy Apple and Facebook on the cheap. The market has really been doing you a favor.
For those who follow market sentiment, this stolid, even optimistic attitude does not signal a market bottom. At market bottoms, everyone hates stocks. No one wants them, at any price.
I could be completely wrong—it won’t be the first time—but the more people are rational, sensible and optimistic, the more it seems like we have more to go on the downside. There are times when happy thought is not your friend.
Besides, the Dow Theory, a venerable old tool for projecting mega-trends in the market is now on a sell signal. Yet, the Dow Theory is widely followed, so let’s not discount the possibility that it’s a self-fulfilling prophecy.
Among the more sensible commentators on the current market correction is David Leonhardt of the New York Times. His is a balanced view, based on the fact that by most measures of value stocks are still expensive. His column dates to Monday, August, 24.
The smart advice during a falling stock market is not to panic. Selling out of panic often leads investors to miss out on the market recoveries that typically follow a drop, because it’s all but impossible to predict when such a recovery will begin.
But here is some different advice that’s worth hearing during a week like the current one: Don’t expect the next few decades of stock returns to be as good as the last few. Be prepared for a period in which market dips are not inevitably followed by bull markets that make the dips look like footnotes. Be prepared for something like mediocrity or even disappointment.
Why do I say this? Because stocks can’t boom forever. And the last 30 years, for all of their ups and downs, have mostly resembled one long boom. Stocks began rising in the early 1980s, and every market correction since then, including the financial crisis of 2007-8, has been quickly erased.
As a result, stock prices today remain historically expensive, even after the declines of recent weeks. Stocks are more highly valued than at any point from the 1940s through the mid-1990s, relative to long-term corporate earnings….
The stock market is no longer in nearly as big or as bad of a bubble as it was in 1999 or 2007. But the market is still historically expensive. When it’s expensive, bad days happen more often than when it’s cheap.
Strangely, he concludes that you should hold on to your stocks:
None of this means you should start selling your stocks. They’re probably still the best long-term investment that exists. Just don’t get fooled into thinking that they’re always as good as they’ve been over the last generation.
And yet, didn’t he tell us, in the opening of his column, not to follow the conventional wisdom that is telling us to hold on, to hang in there. Note the subhead of his column:
Stock prices remain more expensive — relative to long-term corporate earnings — than at any time from World War II to the early 1990s.
When everyone is buying the dips, it might be a better idea to lighten up a bit on the inevitable rallies.