Even the darkest cloud has a silver lining. Is that true for the stock market, too? The scary volatility of the market has hammered stock prices, but now investors have the chance to pick up some bargains—maybe. Market experts believe that opportunities do exist, but, as always, timing and investor discipline are key. Here’s what some analysts are pondering:
- Is it time to get back in? Generally experts believe it is easier to determine when the tide is about to turn for the better--rather than spotting a market high. Traditionally, declines are likely to halt when recognition of a stock’s fundamental value starts to occur. On the contrary, rising stock prices can be buoyed to soaring heights by investor exuberance.
- A dizzying drop in stock valuations (like the almost 10-percent decline in the Standard & Poor’s 500 Index from mid-July to mid-August) makes many investors bolt for the exits. Sustained declines take down the best stocks along with the shaky ones—a reverse of the old market saying that a “rising tide floats all boats”. With this in mind, try to assess the real value of a company’s business. Volatility in prices might present some new opportunities but it shouldn’t tempt investors to forget to examine the business’s fundamentals.
- Some stocks have been overly punished by the market. Interest-rate sensitive and growth stocks may have taken the brunt of the recent beating, but some growth sectors offer continued profit potential and may merit a closer look.
- Beware of impetuous buying. Most inexperienced investors tend to rush in if they spot a bargain. History suggests that it usually takes months for stocks that have taken a hammering to become viable for a rebound. There may yet be further corrections on the horizon.
- Once the correction comes to a final halt, financial stocks –banks, financial services and some brokerage houses (especially those who were directly involved in the sub-prime market) could represent some outstanding values—with their price to earnings ratios lower, and their yields higher.
- As for fine tuning your investment strategy, history also suggests that following a market panic the decline in financial-related stocks lasts several months –significantly longer than the decline of the market overall. Statistics also indicate that when the Federal Reserve intervenes (as it has recently), growth stocks frequently rebound faster, fueled by lower interest rates and faster growth created by the Fed’s measures.
- However, bear in mind that some of the nastiest melt-downs in the ’90s—including the Savings and Loan debacle of 1989-1990—saw stock prices rebound more than 50 percent about two years after their lowest point. It is important to recognize that investors who benefited from this were both patient and focused on long-term results. Those gains were not visible for a long time. Within the first year after the crisis, financial stocks saw a loss in value of almost 50 percent.
As always, smart investing requires strategic thinking and fortitude. Careful consideration and patience are vital in today’s investment world.