Get Used to Triple-Digit Days

08/08/2007 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of the Independent Advisor for Vanguard Investors, says investors should ignore market volatility and focus on companies' strong earnings and a good economy.

Over the past month, the Dow Jones Industrial Average-which for both better and worse is the most widely followed measure of US stock prices-saw [at least] eight triple-digit daily moves, inciting both greed and fear far from the corner of Wall and Broad.

While much is being made of these 3-D days, I'd say, "Get used to it." This is what happens when your benchmark is measured in five digits, not counting the fractions. The Dow, as you may recall, hit a record 14,000.41 on July 19, and over the next eight trading days to the end of the month, it dropped 788 points, or 5.6%, including a two-day, 520-point, or 3.8%, decline.

But rather than view this as a substantial correction due to sky-high equity valuations, for instance, I see it more as a recalibration of (and by) the credit markets concerning the ease with which liquidity has been provided for any number of financing activities, from buying a home to buying back stock to financing a corporate takeover.

Take away easy credit and some liquid­ity and you get a reset of sorts, but to think of this as the beginning of the end is to give way too much credit to the fear-mongers. Again, take a somewhat broader perspective on the market. July marks only the third declining month over the past dozen. The two prior to this one saw losses of less than 2%.

So, I chalk this up more to a review of valuations or a "pause that refreshes," rather than a wholesale capitulation. Stock prices still have room to catch up to earnings gains, and even more so after the month's swoon. And don't for a moment think that a nominal record oil price over $78 is causing commo­tion on the Street. Stock markets have been ignoring oil for some time now.

One more thing: don't ignore the other major component in most inves­tors' portfolios: bonds. After all the noise made about the ten-year Treasury's yield cruising past the "psychologically signif­icant" 5% level on the way to 5.25%, did any of the daily news organs make the same pronouncement when yields fell? No.

Meanwhile, the economy is doing just what I said it was doing-slowing but still growing, as the second-quarter GDP growth of 3.4% makes abundantly clear. Bellwether shipper UPS said it had a rough quarter, but the other bell­wether, FedEx, did just fine, so I'd say from the perspective that goods are moving, we're still okay. And my latest trip to a Best Buy to pick up a monitor for my wife found a huge crowd on a sultry, Sunday evening. The consumer most assuredly is not dead.

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