Understandably, investors are running scared. The violent force of the earthquake and tsunami that devastated parts of Japan and raised the specter of a nuclear crisis could easily spell more trouble down the road for the global economy. Indeed, warnings now abound of a more turbulent and depressed market ahead.
The decline in global equity prices that started on Feb. 18 and got "exacerbated on March 15 by the fear of a worst-case scenario unfolding in Japanese nuclear power plants still needs to play itself out, and will have further to run," cautions Sam Stovall, chief investment strategist at Standard & Poor's.
That makes sense. But let's not forget: When there's gloom and doom in the air, there's also opportunity -- a rare chance to jump on stocks whose prices have been quickly pulled down due to panic among jittery traders. In spite of the market's current sharp decline, nothing fundamental suggests the end for equities has begun, as some commentators are now starting to proclaim.
Crisis Will Keep Fed on Accommodative Course
When the market rebounds -- and it definitely will -- it will be with a forceful kick that should equal the market's snap back after 9/11, and could conceivably catapult the Dow Jones industrial average back to the all-time high of 14,164.53 it hit on Oct. 9, 2007. The Dow closed on Wednesday at 11,613.30, down 242.12 or 2.04%.
In the meantime, investors should keep cool and calm. Look at the situation this way: The U.S. economic recovery is in full stride, and this shock to the Japanese economy can only result in more encouragement for the Fed Chief Ben Bernanke to make sure the U.S. economic recovery doesn't stall, which will mean continuing the Fed's policy of accommodation and loose money.
"S&P's Equity Strategy thinks the U.S. Federal Reserve Board will conclude that low short-term interest rates will help combat the global uncertainty," says S&P's Stovall. What's more, he adds, the Fed's recent statements on the state of the economy "may even increase speculation of a third round of quantitative easing, which would likely aid commodity and equity prices."
Splashy events such as the crisis in Japan or the turmoil in the Middle East invariably distract investors away from the gains the economy has achieved in the past year and a half. In times of geopolitical conflicts abroad and acute emergencies, technical analysts who follow the charts reigning supreme in assessing what's really happening to the equity and bond markets. But investors should pay more attention to the improving market fundamentals: Corporate earnings continue to be strong and the rebounding economy is gaining strength.
Technical analysts, who are skilled at assessing what may lie ahead based on past market trends and patterns, tend to fuel even more of what's already happening. When the market is in full decline, as it is these days, they tend to become more bearish and warn of how much lower it could go. The same thing happens when the market is on the upswing: They tend to calculate how much more upside there is. That's why wise investors should combine both fundamental and technical analysis in probing the market's motions.
An Oversold Scenario Developing
The first thing investors should do when the rest of the investing world is losing its clarity amid utter confusion is to draw up a list of the specific stocks they'd want to buy at bargain prices. Jump in as the Dow or S&P 500 head south. But make sure you have studied the fundamentals of those companies and the technical behavoirs of their stocks before pulling the buy trigger.
Right now, we know the market could still go lower, and that's when more opportunities should be seized by investors. Hopefully, they've already taken profits from the stocks that advanced during the bull market. Proceeds from those sales can fund their purchase of those now under-priced stocks.
Alec Young, analyst at Standard & Poor's international equity strategist, believes an "oversold" scenario may be developing in the international markets -- and the Japanese market in particular -- which could be exploited by short-term traders looking to take advantage of the falling prices.
In the U.S. equity market, "we recommend sticking with more cyclical sectors, as a recovery from this pullback would likely benefit those stocks and groups that were hit the hardest," says S&P's Stovall.
This Too Shall Pass
Investors should not lose track of what's important: the resilience of the U.S. economy. When investors refocus on this and away from what's happening in Japan and the Middle East, the shares of companies involved in the recovery, like those cyclical stocks, will be the market's front-runners once again.
Even before the massive disaster engulfed Japan, the markets were already showing signs of wariness and weariness. Not a few market analysts had been predicting a significant market downturn after a year of massive gains for equities. Obviously, the triple calamities of earthquake, tsunami and nuclear crisis in Japan were not being factored into any analyst's equations.
What should be in the equation as we look at markets now is that this, too, shall pass. Investors with the stomach for the ride should play the coming market rebound.
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