Now Is Not the Time to Sell Stocks

07/28/2008 12:00 am EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor in chief of The Kiplinger Letter, says there are a lot of reasons why holding or buying more stock makes sense now.

In today's economic and financial climate [of] broad gloom punctuated by periodic gleams of hope, investors may panic or become paralyzed.

With the market clearly in bear territory, the Standard & Poor's 500 having recently joined other benchmarks in a 20% decline from its October 2007 peak, some folks may be tempted to throw in the towel.

Don't. It's not the time to sell US stocks.               

If you've been buying [through] dollar cost averaging, whether by contributing to a 401(k) or otherwise, keep it up. In fact, if you have extra cash that you won't need for at least three years, buy more.

Why? First, because the alternatives are poor. Returns on cash are very low and bonds [are] overvalued, especially Treasuries. For those seeking a safe yield, municipal bonds are the more attractive option. Foreign stocks are relatively more expensive. Real estate remains bogged down. As for commodities, most are at least fully priced-some, very overpriced.

At last, relief is on the horizon [in the form of] lower prices for some commodities: copper, stainless steel, nickel, lead, and zinc. Look for all to head down in 2009 after the spikes of the past two years. Resulting lower costs for wiring, pipes, tubing, tools, and other items will raise profit margins for manufacturers and others.

At today's depressed prices, stocks appeal.

With the S&P 500 price to earnings ratio at about 14x-15x for the 2008 calendar year, shares in many companies are considerably undervalued by historical standards. What's more, the earnings outlook is turning more positive: After dropping nearly 6% in 2007, earnings should grow about 5% this year and much more than that next.

Health stocks are a clear value. Pharmaceuticals have been pummeled by patent expirations, the lack of new megadrugs, and increased regulatory scrutiny. Chemical firms and independent refiners look good as oil prices continue to slide, easing the squeeze on margins such firms have faced.                

But there's a second good reason to stick with stocks, despite the volatility.

It's in just such bear markets that the foundations of future gains are laid. We don't know what the next six months will bring. The market may fall further. It may not.

What we do know is this: the rebound from the bottom is usually steep. In the past nine bear markets, stocks fell an average of 12 additional percentage points after crossing the 20% threshold into bear territory. Seven times, the S&P rebounded to the 20% mark within a year. Four times, the S&P regained the peak inside a year.

Buying on the way down ensures that you'll catch the big bounce up.

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