No Cause for Concern About Recent Market Declines
Second Quarter Performance:
This year started off well for the stock markets with the S&P 500 breaking 1200 but since then these gains have evaporated due to a number of economic events. These include sovereign risks in Europe, poor US jobs data, the US housing crisis and a slowdown in China, as well as global growth uncertainties. Since March, markets have taken a tumble and by the end of the first half of 2010 almost all the major global markets are down. The World Market Index declined 11% while individual markets were down as well, such as Shanghai (China, down 26%), S&P (US, down 9%), FTSE (UK, down 11%) and Hang Seng (Hong Kong, down 8%).
Declines Are a Recurring Market Feature
Markets go up and down with regularity and this is part of market behaviour. Instead of being fearful when markets drop it should be seen as an opportunity to add quality stocks at cheap prices. The current decline is no exception and so presents a great opportunity to add to holdings. If the US economic recovery continues and corporate profits expand it is likely that a good amount of cash held by individuals and companies will go into purchasing stocks. Some of the large emerging economies are continuing to show good growth rates. China is still expected to grow at a very handsome 10% rate in 2010, even though this is down from a sizzling rate of 12% in 2009. India is also expected to grow at 9% this year. Though investors might feel safe with money in savings accounts or money market funds, it is not possible for them to achieve their long-term goals when returns on these investments are between 0% and 3%. The stock market still remains the best place to achieve investment goals.
An Opportunity to Add to Holdings
Market declines are great times to buy more stocks, and this time is especially so as valuations have come down drastically. The S&P 500 is currently trading at 10 times the next 12-months earnings, its lowest level since 1989. Similarly the MSCI World Index is trading at 15 times reported earnings, its lowest level since March of 2009 when stocks had bottomed in the aftermath of the financial collapse that began in 2008.
To make money in the stock market one should buy when stocks are cheap and out of favour, and sell when prices are near a peak and everyone is wildly enthusiastic about future prospects. Unfortunately most people do the opposite and that is a sure way of losing money. Our approach has always been to buy quality stocks when they are cheap and market sentiment is negative, and this is such a time. We are adding stocks to the accounts that we manage as well as our personal accounts.