Sorting through a daily barrage of rumors, market chatter and market swings has left most investors punch-drunk, wondering whether the worst is over, or if another storm is about to erupt. After a month of such uncertainty, what consensus, if any, is emerging from Wall Street experts?
There appears to be no doubt that the recent whipsaws in the market were precipitated by bad news from the mortgage companies, and that the situation deteriorated further when the Fed’s initial inaction helped to foster a credit crunch. Even seasoned investment gurus were at a loss to explain whether the mid-August trading frenzy was due to investor panic or to real concerns about stock valuations. If you’re overwhelmed with contradictory information, take heart. You are not alone. When emotion and psychology are the primary driving forces—rather than financial fundamentals—even experienced financial strategists have a hard time formulating a game plan. As the dust settles at the end of a tumultuous month, here’s what some leading pundits are thinking:
- Companies that are “liquid” (i.e. those that are able to self-fund in the current credit squeeze) are a promising bet. Tighter lending has made everything from a home loan to a corporate acquisition more expensive. For companies with extensive global operations, there may be additional pressure from a weakened dollar, which reduces overall profits.
- Bernanke’s move to lower the discount rate (the rate banks pay for loans from the Federal Reserve) is designed to help banks address short-term liquidity problems and shore up the financial system without exacerbating “confidence” concerns. Many applaud this move—a selective boost to financial confidence–and are pleased to see it rather than a wholesale effort to lower rates across the entire economy.
- Large-cap companies will come into their own again. Overlooked in favor of riskier, small-cap stocks and private equity deals when credit was easy, the bigger corporations –with strong balance sheets and substantial cash positions— will be back in favor.
- With stock prices slumping, there are plenty of buying opportunities. Savvy investors know that not all depressed stocks represent bargains. More than ever a disciplined approach to buying equities is needed. Times like these require both discipline and flexibility and balancing these two attributes is challenging for even the most experienced traders. Don’t hesitate to get expert investment advice and review any planned strategic changes carefully before jumping into the fray.
- Panic in the markets can be your friend, but only if you don’t succumb to the same emotional impulses. Remember dramatic headlines sell newspapers and TV pundits are in the business of delivering entertainment as well as financial news.
- Cash is king. Some experts advise sitting out the chaos, and earning modest returns in money market funds whilst you wait for bargains to emerge. However, deciding when to get back in will not be easy.
Whatever their respective opinions, Wall Street gurus continue to watch the Federal Reserve’s moves closely. Monetary policy is center stage. Will Bernanke stay with the current course, or will he cut the federal-funds rate on September 18? Time alone will tell.