Where Do Markets Go from Here?

I’ve been a professional in the financial industry for about 20 years. Plus, as a CFA & MBA, much of my study was focused on Market History. I’ve seen what every investor has seen – markets go up & down. I’ve even quoted to all of you on several occasions the “stats” on that – we have on average 3-4 corrections of 5% per year; additionally, we have 1.1 x per year a correction of 10%+. Yet despite all investors past experiences, we still hear a common refrain when the markets go down – “Economic Crisis”, “Double Dip Recession” – all implying “if there ever was a time to panic, this is it!”

Somehow, despite our deepest fears, despite how much negative media coverage, the market always comes back. It happens every time. Just as quickly as the market dips, it starts to go back up – different reasons of course (earnings exceed expectations, tragedy averted (nuclear crisis, gulf oil spill).

Yet, somehow, when the decline is at its extreme, the market’s return to health seems like an impossibility. Take the state of affairs of the past few weeks. Right now, we are back down again—primarily because of unease about the European debt condition, and fears of a “Double-Dip Recession” in the U.S.

Pretty depressing, huh? Well, the key thing to note is that it isn’t all bad. Sure, it would be nice to know ahead of time when these opportunities will crop up, but lacking a crystal ball, we are all in the same situation. The fact is, the Market goes up and down, so the smart thing to do is make the best of it. (Look at the 2-year chart for the S&P500 – HERE ). Take the time to make any needed adjustments to your plan. Better yet, are any changes needed? Even Better yet – do you HAVE a PLAN??

Despite Weakness, a New Recession Remains Unlikely

Despite the overall negative tone among investors, not all of the news has been bad in recent weeks. Data regarding July pointed to the beginnings of a stronger economic second half of 2011, including better payroll figures, industrial production, unemployment claims and retail sales. Additionally the Index of Leading Economic Indicators actually rose in July and was ahead of expectations. (However, it is important to remember that August is when all of the stresses in the credit markets and equities spiked, so it is very possible that this may negatively impact August’s economic statistics).

The question, then, is whether or not the United States will experience a new recession. The concerns on the “yes” side involve lingering effects from the rise in oil prices, contagion from European financial stress and dysfunction in Washington, DC that could negatively affect the confidence in financial markets. In contrast, those opting to answer the question “no” would cite the zero-interest-rate environment, a positive yield curve, a cheap dollar, reasonable support from emerging markets growth and a strong corporate sector. From our vantage point, we continue to lean toward the positive and believe that the United States will avoid a recession, but will remain in a very slow-growth environment.

Bob Doll (Black Rock’s Chief Strategist, whom I respect) believes the situation in Europe remains a wild card. Ultimately, Europe will move further down the path of greater fiscal integration, possibly by adopting some sort of euro bond approach, but the path to get there will be extremely difficult given both the political constraints and the difficulties of harmonizing fiscal policies.

More Near-Term Volatility Likely

During times of heightened market volatility, investors tend to focus on technical market levels to look for trading ranges. At present, one of those levels appears to be 1,250 for the S&P 500, which was an important floor for prices before the decline commenced a few weeks ago and now represents an important ceiling. The other level looks to be 1,100, which was the low reached during the height of the panic selling. For the time being, Doll expects to see a fair amount of volatility as markets move between those two numbers.

Summary

In any event, my point is simple: Instead of listening to media types keep on about the dips in the market—and letting ourselves get twisted up into a knot—maybe we should remember that the market goes up & down. Instead, focus on what we can control – we can’t predict the future, but we can Plan for it…