Buying Opportunity in Stocks

Topic: Wonderful Buying Opportunity for Longer Term Investors in the US and International Stock Markets

Last week’s newsletter covered the topic of Irrational Pessimism where investors were acting in an irrationally pessimistic manner to some investment options, such as the stock market. The stock market rebounded about 10% during the week and was higher on 4 consecutive days.
Financial experts on the news channels continue to be rather pessimistic. The current topic being debated is the question was last week’s low in the stock market really the bottom? Having these experts being pessimistic creates a wonderful opportunity for longer term investors in the stock market.

The stock market moves with the growth in the US and global economy rather than the opinion of the financial experts. The best indicators are economic data, the price of commodities, especially copper, and interest rates. Economic data indicates that the economy has changed from a severe contraction to approaching neutral. Commodity prices have begun to rise and copper prices having risen appreciably during the last 3 months also suggesting that the economy has improved. Interest rates have also increased during the last 3 months.
In this economic environment what are the most important things to do in order of importance? First, eliminate revolving credit card debt and get rid of this obligation that has an interest rate of about 20%. Second, refinance your home at a lower interest rate, if the rate is over 5.5%, to improve monthly cash flow. Third, payoff any loans on a liability like a car since it is throwing good money after something that is going down in value. Finally, continue to contribute to a retirement plan.

If you have a short term time horizon or are an extremely risk averse investor continue to put money in a money market account or certificate of deposit. A money market at Fidelity is currently yielding about 3%.

A longer term investor should maintain investments in the stock market and continue to make contributions primarily through mutual funds rather than picking an individual stock. An individual stocks carries considerably more risk than a mutual fund.

Things to avoid buying right now: Gold, Long Term Bonds, and Real Estate Investment Trusts. Each of these options will be covered in future blogs.