MARKET UPDATE
Author:  Donald I. Gregg, Vice President, Investment Advisory Services
January 24, 2008

In 2007, we experienced the fifth year in a row of world wide stock markets going up in value. However, we also saw signs of the equity markets struggling during the course of the year, with significant declines in February, August and November.  Since 2008 began, we have seen the stock markets around the world decline in value, with the S&P 500 dropping down 8%.  If we look back to the market high in mid October, 2007, the S&P 500 has decreased 15%.

Clearly investors have concerns about why the market is behaving like it is and what to do about it. 

Why is the Market Down?
In January, we have seen many companies report disappointing earnings, causing stock prices to drop.  In addition, investor concerns have been sparked by a financial crisis resulting from the combination of defaults on subprime mortgage loans and the decline in values in the housing market.  This had an immediate impact on banks and other lending institutions, as they saw the value of their assets dramatically decline in value: they were either unable or unwilling to continue to make loans to not only individuals but to corporations, as well.  This shortage of accessible money means less spending and therefore a slowdown in the economy.  This has led to predictions of a U.S. recession, with the potential that it might spread worldwide. 

 

Well, we may be in a recession, may be entering a recession, or maybe we will miss a recession, for the time being.  But as far as the mood of the stock market is concerned, a U.S. recession is a reality and the market has already reacted to this by dropping in value.  If companies and consumers continue to curtail their spending, it could lead to further declines in corporate earnings and a gloomy outlook for stocks for the rest of the year.  However, all is not bad news, when compared to previous recessions and market downturns:

• Interest rates are low, which allows consumers to refinance their homes at more reasonable rates and buy more affordable big ticket items like new cars

• Unemployment is low

• Stock prices are attractive compared to other investment alternatives

• Companies are making adjustments to improve future earnings

• The prices of commodities, like gas, have dropped significantly, which gives consumers more money to spend on other items, and

• The Federal Reserve is dramatically reducing interest rates

Note that in ten out of the last eleven times that the Federal Reserve has reduced rates (regardless of whether there was a recession), the stock market (S&P 500) has risen an average of 17% in the 12 months after the first rate cut.  This round of rate cuts began on September 18, 2007. 

 

What Should Investors Do Now?
It is important to recognize that recessions happen and sometimes, but not all the time, the market reacts negatively.  In addition, we must recognize the stock market will always go up and down, and that as investors we will be challenged emotionally when this happens.  But as a general statement, stock markets have always recovered, and over the long term investing in the stock market will be a critical factor in meeting our retirement and other financial goals.   So, the best course of action is to stay with the strategy that you have already put in place.  If you feel you do not currently have a long term investment strategy, we suggest you meet with your Freedom One Retirement Consultant and put a plan in place.