When Will the Stock Market Hit Rock Bottom?
I hear this question multiple times per day, especially on TV. Will the market plummeting on an almost daily basis, this question is on the forefront of many people's minds. You have to remember that many people all across the globe are drawing close to retirement age, and this recent setback in the markets has delayed or altered the retirement plans of millions of people.
People seem to be searching for that magical day when everything will suddenly turn around. Newspapers and television anchors will declare that a bottom has been reached, and things will start going back to normal. Home values will rise again, the stock market will start to soar and everything will be right with the world again.
Unfortunately, it's not that simple.
There are many signs that the market may be nearing a bottom. One of the best signs is the overall panic that many people are feeling right now. People are liquidating their investments in the stock market; Jim Cramer is telling his viewers to that they should not be in the markets right now if they'll need their money in the short-term; the media is starting to really ratchet up the number of doom-and-gloom stories that they run. Things are always the darkest at the bottom, and things are certainly bleak right now. Investor confidence is extremely low right now, the VIX is touching new records and the market is getting clobbered on a daily basis. Surely this has all the tell-tale signs of a bottom?
Absolutely. However, these are pretty extraordinary times right now. To look for a bottom when the world is battling a global economic meltdown seems pretty silly. Things are changing on a daily basis - you have bailouts, co-ordinated global rate cuts and a country that is on the brink of bankruptcy (Iceland). This is not your ordinary bear market. This is a once-in-a-lifetime economic tsunami that our grandkids will be studying in school one day.
The markets are going to continue to swing wildly. There will be headfakes where things seem to be recovering and then the bottom will drop out of the market. There will be days when investors seemingly throw in the towel, only to have the markets recover. There will be waves and waves of selling as people who are underwater in their positions finally decide to get out. Short selling bans will end and some companies will suffer. The markets will surge and newly initiated short positions will be forced to cover, creating even more short-term upside. The markets will start to calm down and then a new wrench will be thrown into the works. The markets will sag and a major company will announce better than expected earnings.
My point? It's impossible to call a bottom. Years down the road, we'll look back and point out the bottom and it will seem so easy to spot. However, there are way too many moving pieces and future shoes to drop to try and look for a bottom now. How can you call a bottom when the credit markets are still frozen? How can you call a bottom when the federal government is proposing radical new plans to strengthen the markets almost every day? It's impossible, and people should stop trying.
What can you do in the meantime when it comes to your investments? Go over your investments. Why did you invest in these companies in the first place? Have their businesses weakened significantly as of late? Do you still have a compelling reason to hold the stock?
Then ask yourself - what companies are holding their own in this dreadful environment? Which companies are poised to take advantage of competitor weakness and solidify their positions in their respective industries? Which companies will come out of this mess stronger than ever? The market is terrible right now, but that doesn't mean that there aren't still great companies out there that are compelling buys at these levels.
Make sure to ask yourself what your investing timeframe is first. Do you need your money over the short-term? Or do you have 10,20 or 30+ years before you'll need the money? Find someone that you trust and seek out professional help to plan your investments.
Things will eventually improve. However, there is really no point in trying to time a bottom, as it's practically impossible to do.
Filed under: The Economic Meltdown | Stock Market Education