Well, I guess I can now honestly say I’ve seen just about everything there is to be seen in the stock market. Monday’s 635-point wipeout on the Dow, huge and painful though it was, comes nowhere near the biggest daily percentage decline ever. Still, the internal dynamics of yesterday’s session give me reason to pause and reflect.
According to the Dow Jones, declining stocks on the NYSE swamped advancers by an incredible 78-to-1 margin. That’s a selling tsunami unlike anything I’ve encountered before — and my career as an investor goes back to 1973.
During the autumn 2008 financial crisis, decliners never took the lead by more than 19-to-1 in any single session. Indeed, before Monday, the most lopsided breadth I had ever witnessed (in favor of decliners) was 38-to-1 on that long-ago Black Monday, Oct. 19, 1987.
So what’s going on? There are really only two possibilities.
- The market has discovered something genuinely new (and very bad) that it hadn’t noticed before. Or,
- The market is exaggerating problems that are already well known and capable of resolution.
At this point, nobody on earth knows the correct answer with 100% certainty. However, it seems to me that the most commonly cited “causes” for the recent decline have been with us for some time: sluggish economies in most of the industrialized world, coupled with a struggle by certain peripheral governments to service their debt.
Even if these issues are about to take a turn for the worse, we also know that the private sector has made great strides in adapting to lackluster economic growth. Businesses have cut costs and built cash reserves.
Indeed, according to S&P, U.S. corporations have increased their cash hoards for 10 straight quarters to $963.3 billion, 58% more than in December 2007 when the Great Recession was just getting under way. Corporate America, in short, is in far better shape today than it was four years ago to deal with any economic trouble that may be brewing.
With the cushion the private sector has built (and with many more stocks now representing attractive values), I think it’s reasonable to expect that the panic in the financial markets will soon subside. Even the crash of 1929 stopped within a few weeks, giving way to a five-month relief rally.
Rest assured, though, that I’ll be watching the rebound, when it comes, very carefully. It needs to be strong, broad and sustained. Anything less, and I won’t hesitate to take money off the table.
For now, I would be cautious and selective with new stock purchases, placing an emphasis on quality and dividend yield. Monday morning, Procter & Gamble (NYSE:PG) posted better earnings for the June quarter than Wall Street was projecting — 84 cents per share, versus 71 cents a year ago (an 18% gain).
Yielding 3.5%, almost half again more than a 10-year Treasury note, PG is the type of “fortress franchise” that will let you sleep easy in market storms. Pay up to $64 for the maker of Tide, Pampers and Gillette razor blades. PG is a member of my model portfolio.
Like most emerging-markets stocks, Cellcom Israel (NYSE:CEL) got hammered Monday. CEL carried the added burden of a weak Q2 earnings release before the NYSE opened.
I remain confident that CEL will work through the regulatory and competitive challenges it currently faces. The process will take time, though, as today’s quarterly dividend declaration suggests. At approximately 67 cents per ADS, it’s the smallest payout since early 2009.
If you own CEL (as I do), hold it. Newcomers can nibble at $24 or less — a new, lower buy limit based on my estimate of $2.80 in dividends over the next 12 months.
P.S. I sold my remaining stake in PowerShares Build America Bond Portfolio (NYSE:BAB) yesterday.
