Well, we investors have strapped ourselves in for another gut-wrenching ride down. The headlines scream the doom and gloom: Jobless claims rise, inflation is on the march, global growth is slowing.
The Dow Jones gapped down as much as 520 points at the open, a decline of more than 4%, while the S&P 500 index lost as much as 4.5% and the Nasdaq shed almost 5% at its worst before stabilizing. Reasons include growing fears of sluggish growth around the world, a recent uptick in jobless claims in the U.S. and reports that consumer prices are rising.
But make no mistake: This market is not reacting to individual headlines anymore. There are systemic problems weighing on Wall Street right now — and none of them are exactly breaking news. The prospect of high unemployment for the long term, the reality of slower global growth for months if not years to come and a lack of leadership from politicians in Washington and Europe are the root causes. These news items are just the latest chapter in the story.
This is a sentiment driven sell-off, little more. And that sentiment is pretty gloomy thanks to a laundry list of reasons.
But if you’re curious, here’s a breakdown of the latest headlines that seem to be resonating:
Growth outlook: Morgan Stanley (NYSE:MS) slashed its global growth outlook for the rest of this year and for 2012, saying the U.S. and the euro zone were “dangerously close to a recession.” Global GDP estimates were cut to 3.9% from 4.2% for this year, and cut to 3.8% from 4.5% for 2012.
Jobless claims: New U.S. claims for unemployment benefits rose more than expected last week, according a report today from the Labor Department. Initial claims were up a tiny amount, just 9,000, but the prior week’s numbers also were revised up. Besides, any increase in jobless claims is bad news considering how bad the labor market is.
Political infighting: I won’t waste your time telling you what you already know. There have been no solutions to bust debt or create jobs in the U.S., and little sign that things will change as Obama and the half-dozen serious Republican contenders for president are more concerned with hitting the campaign trail than generating solutions. In Europe, things aren’t much better, with a nice photo shoot bringing together the leaders of Germany and France, but no progress on actually fixing euro zone debt woes.
What Long-Term Investors Should Do Now
As I wrote during the mayhem just last week, investors should be long on optimism and short on fear. If you’re a day trader or looking for big profits in weeks instead of years and months, there’s good reason to hit the panic button. Heck, there’s good reason to perhaps consider playing the downside for another few weeks. But unless you are planning on cashing out your portfolio by the end of 2011, chances are it’s in your best interest to keep a cool head and just sit tight.
It also might be in your best interest to stop hitting “refresh” on quote pages for your holdings, too. It will only give you an ulcer.
Why? Because selling into such drastic downward momentum could really hurt you — especially if you place a market order. The market did not go to zero in March 2009, and it won’t this time. Things will at worst get a dead-cat bounce and will at best stabilize in the days and weeks to come.
The bottom line is this is a completely emotional market right now, so trying to make a rational decision about what stocks will succeed or fail in the current environment isn’t going to get you anywhere. For cripes sake, 498 of the 500 S&P components were in the red as of this writing!
If you extrapolate that short-term panic into a long-term trend, that means that 99.6% of stocks will be lower in a month or a year or a decade from now. That’s just balderdash.
More to the point: If you believe 99.6% of stocks will be lower next year than they will be right now, you should have bailed out of this market a long time ago. And if you believe 99.6% of stocks will be down 12 months from now … well, I guess you can bail out of your positions.
But frankly, if that proves true, the American economy and your family budget have bigger problems.
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
