Market Volatility

Let me start out by saying that I am not worried about the long term prospects of this market and thought I should share my thoughts as to why I am still bullish.

Volatility isn’t anything new when it comes to the stock markets, but it has been quiet since March 2009 so the past couple weeks have reminded investors how quickly things can change.  The calm and low-volatility environment where investors have profited with a fast and furious stock market rally has been replaced with a pullback that doesn’t feel too good at the moment. In the past 17 trading days, the DJIA has experienced 13 triple digit swings.

Debt problems in Greece and other European Countries have been the catalyst for this market correction.  Adding fuel to this problem are worries as to how far debt may spread, the U.S. Government’s desire to control many different industries and the uncertainty over financial regulations, here and abroad.

Let me address the question on so many minds …”Will we see another financial crisis like we did in 2008?” I believe the situation now is different than in 2008 and this correction will stabilize soon.

In 2008 we had a US housing market that was artificially inflated and financial institutions led by corporate executives that were too greedy. While there are concerns that the European debt crisis could spread, I am hopeful that the actions by the European Union, European Central Bank and the International Monetary Fund will keep it contained to a few small countries such as Greece and possibly Portugal, Spain, Ireland and Italy.

More importantly, and what I have been saying for months, is that the US and many other global economies are recovering from the Great Recession and some are even expanding; the complete opposite of where we were in 2008. Along with a growing economy, jobs are being added to payrolls and corporations are earning profits because of top line growth and not by cutting expenses. Unfortunatrely, the market reacts and sometimes overreacts to unexpected surprises, and the events surrounding Greece were too much for investors to handle.

This doesn’t mean that the US is out of the woods yet. The bad news is that we have our own debt problems and should be cutting fat more than we are, but as we have seen, the pork keeps showing up in almost everything our political leaders do.  We have spent a lot of money over the past couple years and this administration is prepared to print more money as they need to.  So lets hope that the economy continues to grow which will help sustain some of the debt issues, but beware if Washington starts hiking taxes, resorts to protectionism games or worse of all, overreaching on financial regulation, all of which can stifle growth.  Overseas, moves that Germany made to ban certain speculative trading and talk of some countries abandoning the Euro has also unsettled investors.

I’m not happy that the market has corrected 10% and is 1,000 points below where it was in April but I am still optimistic that this will be a short lived correction. Just in case, I will be ready to react to events unfolding around the world. We are now in the red for 2010, but still way ahead of where we were in March of 2009.  Back then, I had clients that asked if it was the right time to be investing in the markets when the world looked as bad as it did and I said that volatility can be your friend if you want it to be; I hope that staying the course during these times will pay off as well as it did 14 months ago. My job isn’t always easy, and as I have shared with many clients in the past, I get paid to act rationally with information and make decisions that most investors won’t make for themselves because of emotions.