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Get Used to Triple-Digit Days
08/08/2007 12:00 am EST
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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