Bioenergy, Energy Efficiency, Geothermal, Solar, Wind Power

Amid Panic in the Financial Markets, Remember the Historical Perspective

The past two weeks will certainly be remembered in the annals of stock market history. It was a truly scary market and without question, one of the most volatile in history.

As I have said many times in previous articles: “The best way to make money is NOT to lose it.”

Recent weeks have been the perfect example of this simple philosophy. The best place to be was out of the way! With that said, it is probably NOT the time to be selling stocks if you are still in the market, unless you need to offset earlier year capital gains.

Always remember: a strong tide raises and lowers ALL boats, without exception. When markets are as volatile as they are now, no stock is safe from the panic. Good stocks and bad stocks alike will ALL be dragged down by the market.

Historical Perspective

One thing that has always amazed me is how history continues to repeat itself and no matter how hard we try, the majority of us cannot see it repeating. Take a look at some of the quotes below as an example:

  1. “The U.S. banking system has been stretched very nearly to the limit”

  2. “Now even nations are in danger of default”

  3. “The worldwide threat of financial instability rises”

  4. “The slide is steep, with NO end in sight”

  5. “The U.S. and its allies scramble to head off a global financial disaster”

  6. “Fear of a free fall in the market”

  7. ” Most Americans have lost faith in the stock market”

  8. “Dow suffers its worst weekly drop ever”

  9. “Another Great Depression?”

As you read these quotes you certainly get a feeling of impending doom and a fairly bleak future and I would have to agree, except for one minor point.

Quotes 1 through 4 were all from Business Week magazine in September, October and December of 1974 and January of 1975 right at the bottom of the 1973-1974 bear market.

Quote 5 was from Newsweek magazine in December 1982 at the very bottom of the bear market of 1980-1982.

Quote 6 is from U.S. News and World Report in August 2002 and quote 7 is from the Associated Press in October of 2002, immediately AFTER the bottom of the huge bear market of 2000-2002.

Quote 8 is from USA Today on 10/10/2008 and quote 9 is from Forbes on 10-18-2008

If you read those quotes again it is easy to see how they ALL could be from last week, yet only the last two were recent quotes. Once again history is repeating itself. But back then, the world was ending and panic reigned supreme, just as it would seem today, if you believe the media.

Yet this time panic is, once again, everywhere! The S&P 500 Index has lost 42% of its value, certainly NOT the start of a bear market, more likely very close to the end of a bear market. To add some perspective, in the 6 bear markets that the S&P 500 has undergone, since its beginning (it started much later than the Dow Jones Average) the average decline was 34%.

Remember the market has been in decline since it hit its high in October of 2007 and the average time between bear markets historically has been roughly 4 years. As the last one ended on October of 2002, one could say we were a bit overdue.

The 9 trading days that ended on Friday, October 10th saw a 25% decline, unprecedented, except for 1987 and 1929. In both of those cases the market was UP 15% and 21% respectively in six months. But my “gut feel” is that this market will move much faster than it did in the 1980’s and 1930’s. I think the availability of information on the internet may have something to do with this. When the market turns around it will turn quickly and climb a massive “wall of worry,” headlined by the word “recession” and maybe even “depression” on most magazine covers. There will be stories of terrible retail sales upcoming and falling earnings in all the newspapers and blogs.

Honestly, is there anyone who does not think that we are already in a recession? Is there anyone who does not think that Christmas this year is going to have terrible numbers? Anyone who has been to the shopping mall recently knows that these are obvious conclusions to even a casual observation of traffic in the mall. It is only the media who has not discovered it yet and the Wall Street analysts who have not been to the mall.

At this stage the market is being run by the psychology of fear and panic. This stage of the market has, historically, always been the sign of “capitulation” by investors and a classic selling climax. In fact, on Friday the 10th of October, in an all-time high, 87% of the stocks on the New York Stock Exchange hit 52-week lows, if that is not a sign of panic selling and total investor capitulation then I do not know what would be.

Looking Ahead

Unfortunately, I do not possess an infallible crystal ball and there are no guarantees in the stock market. Investors must evaluate their personal risk tolerance and act within that framework. It is true that it is always darkest before the dawn, but it takes nerves of steel to act on the bleak situation in today’s marketplace. The market could certainly go lower from here, but given the weight of the historical data, the odds favor at least a strong rally in a bear market and a higher market in the months ahead and in the best case, a historic buying opportunity.

I believe that the risks of inaction are so great that governments will have to finally act in concert to create much needed confidence and thereby reverse this crisis of confidence that is the seed of the current panic.

Remember the words of the legendary investor Warren Buffet, who has recently said that he is returning to the market with his personal investment dollars:

“We simply attempt to be fearful when others are greedy and greedy when others are fearful.”

Mr. Lynch has worked, for 31 years as a Wall Street security analyst, an independent security analyst and private investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for 17 years to the Photovoltaic Insider Report, the leading publication in PV that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He is currently a private investor and has from time to time been a financial/technology consultant to a number of companies. He can be reached via e-mail at: [email protected].