IThe first correction in stock prices to exceed 10 percent since the new bull market began in March 2009 appears to have struck fear in the hearts and minds of individual investors in a significant way. Who can blame us? Just over 13 months after the time when we all wondered if we’d be able to pull money out of an ATM, we were just starting to feel better and wham!
We are once again faced with daunting news flow detailing the environmental disaster in the Gulf of Mexico, the economic malaise in Europe and geopolitical tensions in the Middle East and Southeast Asia. If this doesn’t give you a little tightness in the chest, nothing will.
In my last column, I detailed the level of fear exhibited by investors recently as measured by an indicator known as the Volatility Index. The chart and my description were intended to share the likelihood, based on history, that stock prices would be higher in one or two years than they are today. Of course, I had to provide the usual caveat that there are no guarantees and that the markets may move lower before moving higher. Glad I put that in there in light of the continued market correction during early June.
The hard part for most investors is trying to reconcile the flow of economic news with the action of the financial markets. Why did stocks go up in 2009 when nothing seemed very good? Now, in 2010 when most believe the economy is starting to grow again, the stock market struggles again. Unfortunately, this emotional tug of war has been the case for decades as the economy and the financial markets go through their inevitable gyrations.
A recent poll of individual investors asked for their opinion on how the stock market did in 2009. The majority answered that the stock market declined last year, but, in fact, the S&P 500 Index gained over 26 percent in 2009. I suspect this result was due to the fact that many abandoned their stock holdings during the worst period for the market and did not enjoy the recovery which followed.
Recent polls that monitor the bearish (negative) vs. bullish (positive) outlooks of individual investors show more have a negative outlook compared to just six weeks ago when the majority were positive. What’s changed in six weeks? The stock market is down more than 10 percent and causing individual investors to be buffeted by the effects of the market fluctuation, rather than reacting to the opportunity that may lie ahead.
Institutional investors, on the other hand, are now at their most optimistic in the last 12 months as indicated by their positions in the options markets which are now betting on rising stock prices in the future. We, of course, prefer to follow the behavior of professional investors and tend to be skeptical of the mass behavior of individual investors who tend to be wrong at critical market turning points.
I can’t promise you what might happen in the next few weeks, and the markets could certainly move lower before moving higher. But having a disciplined plan for dealing with these fluctuations is far better than being reactive after events have already occurred. Further, I believe that another good opportunity is being presented for those who were previously skeptical and may have missed out on last year’s recovery.
As always, use a common sense asset allocation taking into account the amount of time you can commit capital to the investment plan and your tolerance for volatility.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.