In this section, I look at facts, usually totally correct, that you may read or hear but are misleading. Worse, paying attention to them may be harmful to your investments. This one is about 20-20 hindsight by our leading financial newspaper, The Wall Street Journal.
An October 6 article suggests that now may be a good time to buy stocks because of widespread pessimism about stocks and their “low valuations.” The article has a graph showing the Dow in three periods: 1974-75, 1987-88, and 2002-03. The graph is titled “What Goes Down Must Come Up” and below the title it says “in each of these three market slumps, the bounce back was great for those who bought at the low point for the Dow Jones Industrial Average.”
Wow! Isn’t that something? If you buy at the low point before a big rise in the market, you can make a lot of money. Of course, looking back it is easy to know where the low point was and how large a recovery followed. Unfortunately, the article did not provide any hints about how we could obtain the use of a time machine that would enable us to profit from those past rallies. I would settle for some idea about how to get tomorrow’s newspaper before today’s market closed, but the article was no help.
More seriously, the markets have dropped quite a bit from their highs, enough so that we are now in an “official” bear market. My last issue called that designation gibberish . The more important issue is whether we are close to the bottom now. I never try to predict where or when the bottom will be. I will let my trend following models tell me when I should buy stocks or equity mutual funds, which likely will be after the bottom. Can the market go much lower? The Perspective section of my last issue dug into that question by looking at historical data. The answer is that it may or may not go much lower, which I realize is not very helpful. If we see a drop like the worst in the past, the S&P 500 could fall by another 20-25% from current depressed levels. As explained above, you should not read that as a prediction.
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