*By Michael Norman
When market swoons cause good companies to tumble investors are given a wonderful gift. Huge discounts of up to 20%, 30% or 40% can be had in mere days for world class, blue chip, firms that have long histories of solid earnings growth and handsome dividends. The fundamentals of these companies don’t change simply because Wall Street gets all emotional, but lower priced shares mean you can put more of these stocks into your portfolio.
Over the past 220 years the United States has experienced war, depression, recession, changes in political leadership, assassinations and even terror attacks, but one thing has remained the same: American businesses have always found ways to grow their profits and the stock market is a reflection of that earnings growth.
I don’t deny that the economy is weak and that millions of people are unemployed. That’s a bad situation and it’s a problem that can only be fixed by policy. Unfortunately, there doesn’t seem to be the political will in Washington to address it. Yet despite that, corporate profits for U.S. businesses have climbed to record levels and that has resulted in almost a doubling in the stock averages over the past two years.
To be sure, things could have been a lot worse. We dodged a bullet with the recent debt ceiling deal. The deal that was signed on August 2 averted a default, which could have been catastrophic to economy and global markets. Moreover, the proposed spending cuts will not happen until 2013 or 2014, if that. That’s actually a good thing because cuts of that magnitude now would have put a significant drag on economic demand and we simply can’t afford that.
Another good thing that has emerged from the market slide is that oil prices have come down. Crude oil is now below $90 per barrel and that likely means lower gasoline prices at the pump in the weeks ahead. This will be a boost to consumers, who have had to endure rising fuel costs for some time now.
Interest rates have also fallen to record lows. The interest rate on a 30yr fixed rate mortgage is now around 4.3% and that is the lowest it’s been in about 10 months. This could spur a round of refinancing, which will help reduce costs to households and put more money in people’s pockets.
It’s easy to get caught up in the emotion and the panic. We are surrounded by it. The news media thrives on it because fear sells. It gets you to watch the TV shows and read the gloomy headlines. However, to be a successful investor you must discipline yourself not to pay attention. Or better yet, celebrate the downturns! That’s right, be joyful when they happen because you know that the market has just given you a huge opportunity, which if you use it wisely, means money in your pocket.
Americans are the most consumer-savvy people on the planet. We invented discount buying. We don’t buy unless somebody offers us a price cut. Yet when it comes to investing most people do the exact opposite: they buy when the price goes up and they sell when the price goes down. If more people behaved in the market as they do at their local store, we’d have a lot more wealthy investors in this country!
*Mike Norman, Chief Economist of John Thomas Financial, is an economist and trader whose career spans over 30 years on Wall Street. He began his career at Merrill Lynch in 1979 then went on to become a member and floor trader on four U.S. futures exchanges (NYFE, NYMEX, COMEX, CME). Mr. Norman is a sought after TV commentator and has been seen regularly on CNBC, Bloomberg and Fox News. In 2003 he signed with Fox News as an exclusive Contributor and continues to appear on a regular basis on the Fox Business programs. Mr. Norman is an expert on fiscal and monetary policy and has created a unique indicator called the Fiscal Liquidity Index that looks at government spending and its impact on the financial markets. The Index is published daily and is carried on the Bloomberg system. Mr. Norman has a BA in economics from the University of Pennsylvania and a Masters from UCLA.