Donna Block
SHAREWORLD
After last week’s blood- letting in the stock markets I didn’t know whether to reach for the phone or some serious mind-altering drugs. But why was I surprised? All of us who take more than passing interest in share prices knew that it had to happen sooner or later – the dreaded stock market correction, that is.
More than $2-trillion of investors’ wealth got zapped last week. But, even though it was the worst week in Nasdaq history, and one of the worst in Wall Street’s, there was something very eerie about how orderly the sell-off was. Traders and investors were nervous and some were seriously hurt, but real panic – like in the crash of 1987 (I got the T-shirt) – was missing from this scenario.
While the stock market’s rise in recent months has been breath- taking, the speed with which its fortunes vanished has been nothing short of mind-boggling. Investors and traders alike are bruised but are not in a panic mode just yet.
Those that are in serious trouble appear to be the day-traders, speculators, and the everyday Joe who took a second bond out on his house to play the game.
Well, it’s now game over for those who have to make good on their debt.
The sell-off was precipitated after an announcement by the United States government on Friday April 14, that the consumer price index for March showed broad and troubling increases, with the result that shares across the US, Europe and Asia collapsed.
Nevertheless, there appears to be a light at the end of the tunnel. Some investors are hoping that the decline in stock prices will mean that the US Federal Reserve will be less aggressive in raising interest rates in coming months. Economists, however, are not so optimistic. They contend that with the US economy growing at 6%and above for the past six months and showing no sign of letting up, Federal Reserve chair Alan Greenspan cannot afford to take a more lenient stance in this environment.
There is also the hope that as in other market declines over the past decade, investors will be quick to follow experts’ exhortations and buy on dips. That kind of buying has driven US stocks, especially technology stocks, to the unprecedented levels they achieved before the storm. It has also spilled over into European, Asian and African markets where technology issues are becoming a prominent fixture.
Buying did resume when markets opened on Monday and both the Nasdaq and Dow posted one of their best days ever. But as investors reviewed the damage wrought upon them the week before, there was definite uncertainty about the market’s near-term prospects, especially in the technology sector.
So, I guess the big question on everyone’s mind is “so what do I do now?” The answer is, what you can afford to.
But be warned – anybody considering bottom-fishing in these icy waters should take into account a couple of none-too- reassuring factors. Foremost among them is that even at these levels, many shares in the technology sector still carry major downside risk. Stocks that had outrageous valuations are now giving that up and, appropriately, however, others that are generating cash and have real earnings are also getting hammered.
Which shows that markets, while
usually efficient, are often not rational. And the irrationality currently on display in technology stocks has created pockets of opportunity for the right kind of investor.
It is also a good time to remember that because the tide is turning and may not necessarily be flowing in your favour, picking high-quality stocks – not the cheapest ones – makes the most sense.
Those investors looking to take a breather from the turmoil should consider old-fashioned, old economy value stocks, said one analyst, including shares in metals and paper companies, and energy service and exploration concerns.
These old economy shares have been out of the limelight and present good value in any kind of market.
It’s also unclear if the market is at, or near, its bottom. Many analysts feel that a real rebound in share prices across the board may take months or longer to get under way. So take a deep breath, hang on to your hats, wait for some direction and enjoy the ride.