| Since the beginning of the year, the financial markets are experiencing extraordinary volatility. It is important that as investors that we keep this in proper perspective.
Stocks are pricing in a severe global recession, despite forecasts from top economists that call for sluggish economic growth through 2008 but no recession. Earnings forecasts call for a weak first half of the year followed by a significant rebound in the second half of the year. These forecasts may not prove precise, but they serve as a reminder that the current problems will eventually pass.
The economy is however near a tipping point, as additional negative surprises may be enough to bring on a recession, rather than the soft landing we expect. During the past four recessions dating back to 1980, the average decline in the Standard & Poor’s 500 index was -17.9%. For the most part each of these recessions has been short and mild. From the October high of 10/9/07 to last Friday, the S&P 500 index is down -14.81%. In other words, based on history, most of the damage could be behind us and that selling now could prove to be an emotional misstep.
This morning the stock markets opened sharply lower again. History has shown that some of the largest single day losses have very often shortly followed some of the largest single day gains in the Dow. The Federal Reserve announced a cut in short-term interest rates of an additional 50 basis points. It is hoped that lower interest rates, combined with a credible fiscal stimulus package, can help the economy avoid a severe recession.
Volatility breeds fear in many investors but if you have a long-term outlook, even the most volatile times present opportunities.
(c) Girard Partners Ltd.
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