It's official. All over the world, investors are finished with stocks. Nobody wants to buy them, and people are rushing to sell any bad news -- which has been plentiful.
Investors have not been quiet about their concerns, either. According the Financial Times, investors pulled out approximately $100 billion from equity funds worldwide during the first quarter of 2008. Over the same period last year, investors added just under $20 billion. It doesn't matter how well a certain business is doing during this environment; if that kind of money is being pulled out of equities, then just about everything will go down.
Nobody wants anything to do with stocks these days. And for a change, it's not just U.S. stocks taking the hit. Trying to claim the world title for the biggest one-time write-off ever, UBS (NYSE: UBS) today announced a $19 billion charge, signaling that financial stocks around the world still aren't out of the woods.
What's more, major indexes around the world are feeling the hurt. Just take a look at the performance of major stock market indexes in various countries through the end of March:
|
Country |
First-Quarter Return |
|---|---|
| U.K.* | (11.7%) |
| France | (16.4%) |
| India | (19.3%) |
| China | (32%) |
|
Russia |
(10.5%) |
|
U.S (DJIA) |
(7.9%) |
|
Brazil |
(5.4%) |
*We know the U.K. is not a country, but simple charts are the best charts.
Mark one up for the home team
Considering what's been happening on our side of the globe, the U.S. markets have done quite well relative to those of other countries. With the housing market tanking, billions in write-offs from financials like Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER), and the collapse of Bear Stearns, our markets' losses seem like a drop in the bucket compared to what some countries are seeing.
Will things get better or worse? There's no way to be sure -- and there's no benefit in speculating about things we have no control over. Yet the worldwide global market declines we're now seeing, along with massive amounts of capital outflow from equities, can eventually prove to be a dynamic catalyst after the markets' mood improves.
What has fallen shall again rise ...
While nervous investors may temporarily feel comfortable sitting on cash, interest rates that are relatively low in many areas of the world won't offer solace for long. Granted, if equities continue to be perceived as a losing bet, then sitting on cash is great, regardless of the low returns. Although Japan has interest rates lower than even the U.S., cash investments in the U.K., Europe, and Australia pay better nominal returns -- returns that have attracted the attention of U.S. investors.
The problem with being in cash now is that since you probably don't want to be stuck in low-yielding investments forever, you have to guess when to jump back into the market. Along with today's carnage among stocks are many bargain investment opportunities. By the time market sentiment improves, many of those bargains may have disappeared -- and you'll have missed out on potential profits.
True, sitting on the sidelines may help you sleep better at night -- especially if markets continue to perform badly. But companies like Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) offer profitable business models along with huge cash hoards. Investing in a company like Berkshire may easily be better than cash.
Profit from fear
Fear in the U.S. markets has spread throughout the global economy. Along with that fear comes opportunity, as events like forced liquidations distort valuations. It's true that severe market declines usually do a good job of cleansing the market of low-quality businesses, and some businesses that suffer severe declines may never fully recover. The Internet bubble was a good example of this, as even strong companies like Intel (Nasdaq: INTC) and eBay (Nasdaq: EBAY) are well off their all-time highs.
This time around, the same will certainly be true of many financial stocks for years to come. However, other companies that successfully weather the storm, generate profits, and produce cash for investors will make great long-term investments. The best investors zig when the markets zag, so while the world mopes, the long-term investor should have cause to celebrate.
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