Markets falling: How far, how scary?

Posted by Tim

June 27, 2008

As I sit here writing this (Friday morning) the stock market is trying to hold even on some positive personal income numbers. The last few weeks have been very hard on stocks in general. So, is this the great bear market of the new century or a short terms set back and positive growth will eventually drive stocks higher? First, let us see what some of the market averages have done since recent peaks:

Dow Jones Industrial Average: Down 12.2% since peaking just above 13,000 in mid May.
NASDAQ Composite: Down 8.8% since an early June peak.
S&P 500: Down 9.7% since May 19.

Interesting that most of the major indexes peaked on May 19, but the NASDAQ was off a little on May 19 and reached a higher close on June 5. Now a couple of ETF’s of high interest sectors:

Energy Select Sector SPDR: (XLE: 44.30 -2.18 -4.69%): Up 29.8% since low on January 22, but off 4% since May 20 peak.
Financial Select Sector SPDR: (XLF: 12.30 +0.30 +2.50%): Current price is down 29.4% since Feb 1 peak and down 24% since recent recovery peaking on May 2.

In spite of all of the tea leaf reading and parsing of arcane government data, there are (IMO) just two factors driving the market downward. First, is the strong inflationary factor in industrial commodities with oil leading the way. Raw materials and transport for most manufactured goods are going up and high gas prices are a serious negative on consumer sentiment. Second, the forced mark-to-market and subsequent write downs of huge amount of debt instruments held by the financial institutions has caused a virtual collapse of the stock prices of all businesses that rely on lending and credit, no matter the credit worthiness of the business or collateral.

At some point in time both of these trends will correct. If the world economy is truly slowing, energy demand will slacken and prices will fall. Oil prices have doubled in the last year and emerging economies and developed economy consumers are starting to take steps to reduce their energy costs.

Although there is some true crap out their in the finance securities that have fallen so much in value, there is a bunch that has been marked down 20, 30, 40% and will at some point pay off close to par values. Because this paper is currently treated the same as radioactive waste, I am sure astute investors are buying or holding these securities and anticipating the day when their patience is rewarded.

At this point my stock holdings are off something similar to the 10% the market averages are down. Yesterday I think every stock in my tracked portfolios was down except for Silver Wheaton (SLW: 3.399 -0.131 -3.71%). Fear currently drives the market, so I am going to hold my positions, collect a few dividends, and wait for earnings season to start at the end of July into August. At that time, we should see that many companies are doing fine and the current fears are a little misplaced.