advertisement
Have the pros panicked?
I'd say yes. In their rush to get out the door first, professional investors -- the folks who borrowed money to buy stocks and bonds in risky markets and then bought derivatives to "insure" against the risk (they hoped) -- have led a sell-off far nastier than any change in economic or financial fundamentals justify.
Does that mean you should rush to buy? Not at all. In any sell-off this fast and this extensive, you should look for a solid sign that we're nearing a bottom before piling in. Moves like this always go further than anyone expects before starting a rebound.
The timing of this market sell-off couldn't be much worse for anyone looking for a bottom. Stocks have entered their weakest period of the year. In August and September, stocks face two of the historically toughest months of the year for equities. Although the interest rate increase that is now almost certain to come out of the Fed's meeting on June 28-29 is likely to stabilize the market (absent some unexpected scary language on inflation), I don't see any real upside catalyst emerging until the fall.
So with this column I'm going to do something slightly different. Instead of giving you three short term -- six months or so -- stocks to buy now, I'm going to give you three stocks to add to your watch list. Take the market's summer doldrums to figure out which, if any, fit your portfolio and investment goals.
Blame the fed? Or inflation?
You could see what I'd call panic in the selling action on Monday, June 12. Trading was halted on the Colombia stock exchange after the market fell more than 10%. Mexico's market tumbled more than 4%, its biggest drop in more than three years. India's Mumbai stock exchange, one of the markets hardest hit in this sell off, fell another 3.4%.The selling Tuesday started early, as Japan's Nikkei 225 dropped 4.1% to its lowest level since Nov. 16. That was the indexes biggest point drop since Sept. 12, 2001, the day after the terrorist attacks on New York and Washington.
The markets for gold and other commodity metals went into free fall. Gold dropped $44 an ounce to $568 Tuesday, a far cry from its recent high above $700. That was the biggest one-day drop in gold prices in 15 years.
And what's behind these huge drops? Is it a fear that the Federal Reserve will raise interest rates another 0.25% on June 29 and take a whack at economic growth?
The optimists at the White House say U.S. economic growth will "plunge" to 3.3% in 2007 from the current 3.6% annual rate. Other economists, not so wedded to their rose-colored glasses, say 3%. In Europe, the European Central Bank sees growth of 1.8% in 2007, down from a projected 2.1% for 2006. On the day of the huge sell-off in Tokyo, the Japanese government even reported a pickup in economic growth to an annualized 3.1% in the quarter that ended in March 2006. Those revised numbers were a huge improvement from the first reading, which showed growth at an annualized 1.9%.
A drop in growth of 0.3 percentage points (in the United States) or a pickup in growth of 1.2 percentage points (in Japan) doesn't seem commensurate with the dimensions of this sell-off.
Or maybe it's inflation that investors fear. If growth is too strong, or remains stronger than expected, inflation could get out of control and force the Federal Reserve to raise interest rates again and again and again. Too many rate hikes could put the economy in a recession.
Video: Jubak on stocks to consider once the sell-off subsides
Except where's the inflation? Certainly not in the official measures. The May core producer price index, released on June 13, was up 0.3%. That's higher than Wall Street expectations of 0.2%, but it still adds up to a very modest annualized rate of 1.5%. The Core Consumer price index, scheduled for release today, is expected to show a 0.2% gain for an annualized rate of 2.3%.
That's a tad higher than the 2% rate that the Federal Reserve says it prefers. But is it enough to lead the bank to crush growth? I don't think so.
Quick exits
Of course, when you're in a panic, you don't have time for this kind of nuance. All you want to do is sell -- before other investors beat you out the door and drive down the price of your portfolio positions.Selling fast is especially important if:
- You've borrowed money to purchase your stocks, commodities, or options. If the assets fall enough in value, your lenders will step in and force a sale to protect their money. The huge drop in gold on June 13 had all the earmarks of a forced sale by some big investor or investors as a result of a margin call. Some of the moves in emerging market in recent days have the same feel.
- You're a momentum investor following hot money into markets that are climbing. You know is that hot money flowing in created the boom in Indian stocks or gold, and that hot money flowing out can just as easily send prices plummeting. In 2005 $11 billion in overseas money flowed into India's Mumbai stock exchange; that pace picked up to $4 billion in the first quarter of 2006. And then reversed, creating a rout.
At some point, the selling stops because either everybody is out the door or those that got left behind figure it's not worth selling.
But an end to selling isn't the same as a beginning to buying. The rise in global interest rates is gradually taking some money out of global financial markets and making much of what remains a trifle more worried about risk. This money is likely to sit on the sidelines for a while looking for a trend to play and for momentum to show itself in one sector or another. And it will wait until it can see a decline in risk and identify a potential catalyst for higher prices. That could well take until the fall.