May brought no relief to anxious investors as the market gyrated in response to troubling international news and mounting worries on the home front. Pundits disagree on how to classify the marketís volatile performance over the last couple of months - whether it is the end of a bull cycle, a short reprieve in a larger bear market, or a blip in an overall upward trend. However, they do agree on whatís causing Wall Streetís current woes - mounting U.S. casualties in Iraq and the sad, shocking stream of images from the Abu Ghraib prison; escalating bloodshed throughout the Middle East; as well as Chinaís economic slow-down and, closer to home, escalating oil prices; inflation concerns; uncertainty over the outcome of the presidential race and the specter of rising interest rates.
May saw some pivotal events on the exchanges - none of them uplifting. On May 11, following the death of the Iraqi Governing Councilís President in a suicide bombing, the markets fell world-wide, and all three Wall Street market gauges posted new lows for the year with the Dow dipping below 10,000 for the first time since December 2003. In addition, concern over the U.S. role in Iraq, coupled with reduced refining capacity state-side, helped to push oil prices to record levels as crude topped a whopping $41 a barrel.
Disciplined Investment Strategy
However you choose to slice it, the Dow is down around 800 points since February this year and, seemingly stuck in a narrow trading range, continues to struggle to break through the 10,000 mark. Before becoming too despondent, analysts suggest investors take a look at longer term trends and performance data. They note that we have just come off the longest rally, without a correction of 5 percent or more, in 100 years and that what we have now is a correction of about 7.5 percent. This may not be great news but it is not alarming either. Investors tend to have short memories when turbulent times arrive. If youíve had a bumpy ride for the last few years, keep the bigger picture in mind. It may surprise you to know that S&P 500 has posted an annualized return of 11.7 percent over the past decade. With this in mind, the pros suggest that investors develop a disciplined long-term strategy to help ride out the inevitable highs and lows and avoid knee-jerk reactions. Looking ahead, many experts remain confident that the market will deliver 7 to 9 percent returns over the next few years.
Hereís what they are saying about some of the worries that investors have faced in recent weeks:
- This is not a replay of the í70s.
According to most analysts, it is unlikely that we will see a replay of the dismal stock market performance of the Ď70s - despite conditions that appear to mimic those of three decades ago. Experts note that rising oil and gas prices no longer have the power to halt our economy. We are significantly more efficient and effective in our use of energy sources, and technology has allowed us not only to access reserves that were previously economically unrecoverable, but also has allowed us to harness other new fossil fuel resources like gas hydrates.
- Geopolitical and economic uncertainties abound.
Weíve coped with conflict in the Middle East before, but now we donít know where our current level of military involvement in Iraq might lead, or what impact it might have on our presidential elections back home.
- Stock prices may come under pressure.
Although investment experts believe that it will not be the threat it was in the Ď70s, they note that inflation may put some pressure on stock prices. And - speaking of pressure - everyone concurs that interest rates will increase. Ironically, recent oil price increases are likely to delay the Fedís long-anticipated hike in rates, which pundits previously forecast for summer. Analysts expect - and hope - that an increase in interest rates, which can be expected to squeeze corporate profit margins, will be phased in gradually. Under this scenario, it may be two years or more before stock prices are affected.
Worries about terrorism and the economy are not going away anytime soon. Wall Street experts urge the individual investor to have a disciplined investment strategy and to stick with it. They note it is possible to prosper in todayís volatile times, if the investor focuses on the fundamentals, buys quality, and rebalances using expert professional advice, where needed, to create a properly diversified portfolio.