During a period like this, with stocks plunging almost on a daily basis, it’s clear that fear and shock are ruling the roost. But fear can be overdone. As someone who has been around awhile and has seen many sell-offs, let me offer some advice: Do not panic. Market corrections come and go. They are not the end of the world. Most times they are actually healthy.
The S&P downgrade is a fiscal warning, not an economic event. And the growing fear of U.S. recession may not pan out. There are still plusses out there, believe it or not.
Our financial system is in vastly better shape than it was in September 2008. Vastly better shape.The Federal Reserve is highly accommodative, as illustrated by the upward-sloping yield curve. Using the yield-curve measure alone, the chances of recession based on historical analysis are very low.
And energy prices are coming down, with oil moving toward $80 a barrel. Oil analyst Peter Beutel points out that gasoline prices in the last two weeks have fallen by 35 to 40 cents. Adding in other oil-related savings, the energy-price drop amounts to a $100 billion tax rebate for consumers.
Plus, corporate profits will continue to rise while business balance sheets are pristine and chock full of cash. Consider the combination of solid productivity, moderate wage rates, and falling commodity prices. These are all plusses for the economy and stocks.
So in light of all these factors, it seems to me that the economy can hold up.
Not bad. I feel a little better.It’s not the kind of rapid growth I’d like to see. But it’s not the deep and dark recession that seems to be embodied in the stock market plunge....
Now, if the Paul Ryan budget had passed the Senate and had been signed into law by the president, that combination of tough spending control, transformative Medicare reform, and pro-growth tax reform would have gotten us out of this fix. Alas, it was not to be. But tax rates are not going up, no matter what President Obama keeps telling us. Tax hikes would never get past the House Republicans....
I am not a market timer, and I do not have a monopoly on stock market and economic wisdom. So readers should take this for what it’s worth. I am not wildly optimistic, but I am not near as pessimistic as the market is right now.
The American free-enterprise system can weather these shocks, and I believe favorable political and policy changes are on the way. It will take time. But time heals. Longer-term investors would do well to think about the many stock market opportunities that are opening up as a tough correction runs its course.
Besides, it's still summer.