It Ain’t the End of the World

01/14/2009 1:00 pm EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith, founder and chairman of ChangeWave Research, says we may be close to a market bottom, and investors need to be prepared.

I know that investing in the stock market right now feels like walking through a minefield wearing giant clown shoes. Every move you make has the potential to blow up in your face.

This is the fear that grips most investors, but it's time to get over it. Your wealth and its continued growth are at stake.

The US economy will endure and come out of this debacle stronger for it. There is only one end to the world, and this ain't it!

And this is going to happen sooner than most people think. In fact, I believe that the market will bottom sometime in the first quarter.

That is not to say that the worst is behind us. In fact, I think the worst is still to come.

What the market needs for a sustainable bull rally is for economic conditions to trough—i.e., stop getting worse. And we are almost there.

  • The "negative wealth effect" shock of collapsing stocks and home prices will eventually wear off. The majority of Americans will reemerge as normal consumers. (OK, minus a few hundred thousand homes, but, for the most part, things will be back to normal.)
  • Because companies are forecasting such poor earrings in 2009, only the truly lame ducks will not be able to beat them.
  • Unemployment is a lagging indicator. All new bull markets start long before job destruction peaks.
  • The Federal Reserve has made it clear that it's finished with incremental moves. It's now committed to major action in the neighborhood of trillions of dollars, not billions.
  • Everyone hates stocks, which is what needs to happen before a bottom can be reached. Only the pathologically bullish investors—and the Warren Buffett types with decade-long investment horizons—are left.

The bottom line is that, between now and end of this ugly first quarter, we are on track to hit a real economic trough—i.e., an end to the economic deceleration. That means that it's getting close to the time to be aggressively buying stocks.

I know that is a scary step to take after what we've just been through, but if you take too long to reach the acceptance stage of the grieving process, then you will miss out on the biggest, easiest gains. By the time the recession is declared over, the market will up 40%-50% off its bottom.

So it's time for investors to begin to alter their mindsets and start viewing big down days as buying opportunities.

These are historically bad times, and things will get worse in the first quarter, but that also means that there will be historic profit opportunities for the investors who take the plunge.

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