Yay, the bailout passed!
Boo, the markets are still tanking.
An acquaintance of mine is a professional technical analyst, meaning that he analyses the patterns of past stock and index price movements to gain insights about what's likely to happen next. He says that his various metrics suggest that the red-number days will continue until the S&P 500 hits 950 or so, at which point the market has a good chance of starting its recovery.
As I write this on Monday morning, with the S&P a bit above 1050, that would mean another 10% decline from current levels. A scary prospect in normal times, but right now, that sounds almost like good news. Heck, given the size of the drops on recent days, we could be off and rolling on a new bull market before the end of the week!
It's too bad that, like my fellow Fool Selena Maranjian, I'm skeptical of technical analysis. It's possible that the bottom isn't far off, but I suspect that tough times will be with us for a while. Even if the market starts to recover -- to be fair, I have no idea when that is likely to happen, and neither do most "experts" -- the economy looks like it's going to be ugly for some time yet.
What do we do now? Is it time to bail out and preserve the capital we have left?
The pros and cons of selling
If the volume of emails I got after last week's article advising people to hold the course is any indicator, a lot of you are worried about on-paper losses to date, and concerned about much worse to come.
Those recent losses, of course, have come pretty much across the board, whether you're holding blue-chip stocks like Dow Chemical (NYSE:DOW), promising midcaps like II-VI (NASDAQ:IIVI) that were just starting to pop when they got caught in the market's downdraft, or seemingly great small caps like Volcom (NASDAQ:VLCM).
While a few stocks have thus far escaped the worst of it -- McDonalds (NYSE:MCD) and Wal-Mart (NYSE:WMT), two companies that can be expected to do well in a tough economy, come to mind -- the damage has been pretty widespread. And while that damage is scary, it's also a compelling argument for holding on.
If you sell now, you avoid further losses in the investments you sold. On the other hand, you lock in the losses you've already taken. Right now, those losses don't exist except as a matter of bookkeeping. If the stocks you're invested in -- either directly or via stock mutual funds -- are fundamentally sound, the prices should eventually recover. Assuming you're investing for the long haul, for a retirement that is 10, 20, or 30 years away, you have time to ride this out.
The worst damage may already be done
Some of my correspondents insist that things are different this time, that this isn't a "normal" bear market, that the global economy really is going down a deep hole for the next several years, that many companies will die, and that the stock prices of the remainder will be moribund for a decade.
I can't say for sure that they're wrong.
But I do have a sense that the odds favor them being wrong. We'll likely face a tough bear market and a recession, sure, but not a disaster. The credit markets will get themselves unstuck, soon, because the consequences of staying stuck are incredibly dire. Regulators and central banks will do the ugly things that need to be done. Money will start moving, the TED spread will shrink, and the world will tighten its belt for awhile, but life will go on.
And at some point in the coming days or weeks or months, probably when things look absolutely awful, the stock market will suddenly turn and start rising. And it will keep rising, steeply. Eventually investors will accept that a new bull has been born. And they'll start buying accordingly, because that's what people do when prices seem to be going up.
If you want to own something defensive in the meantime, you could always put a little money in gold or in a bearish ETF -- though you should be careful. But you'll need great market-timing skills to sell that investment and "go long" at the appropriate moment, and market timing is a dubious science.
You might be better served by doing what I've been doing -- buying beaten-up blue chips like Merck (NYSE:MRK) and Coca-Cola (NYSE:KO) that have a good chance of sustaining their dividend payments through a recession, and waiting for the tide to turn. Even if the stock price falls, you'll still be making money (via those dividends) -- as long as you don't sell. And in a market where 10% down is the "new breakeven," a 2% dividend looks like a really good return.
