Is now the time to get back into stocks?
Filed under: Economy, Investing
I was speaking with a reporter at the Detroit News Wednesday about Dow 10,000 when he asked me whether now was a good time for people who had stayed out of the market during its run up from early March, when the Dow was at about 6,547, to put some money back into stocks. Is this a smart thing to do? How many people out there will view this milestone as a reason to buy? And what should these buyers buy?
Before getting into my thoughts on these questions, here's a story about why one person bought and later sold Apple Inc. (APPL). I was speaking to a guy last month who had read my March 5, 2008, post which said that if Apple -- which was then trading at $122 a share -- ever hit $100, it could be a buy.
This fellow remembered the post and when the stock hit $99 in February 2009, he bought shares. Unfortunately, it kept dropping -- hitting a low of $85 the next month -- before rebounding to $184, at which point he decided to take his profits, fearing that Steve Jobs might step down as CEO, crushing the stock. While Apple has since gone up further, he's happy with his profit.
What does this have to do with Dow 10,000? As far as I'm concerned, this fellow's story is a microcosm of why stocks go up and down. If you multiply his trades by the billions of others that happen around the world, you get half the explanation for why stocks rise and fall. The other half of the explanation would be to understand the reasons why the person who sold Apple to that fellow made the trade, and why the next person bought it when that fellow sold.
Since that information is not available, the media offers narratives every day to explain why the stock market has moved in whichever direction it has. And those narratives more often tell me about what the media does not know than shed any light on market dynamics. Here are some of the ones that have come up recently:
• Retail sales are better than expected. I was listening to NPR's All Things Considered Wednesday and this was offered as the reason that stocks were rising. It was a somewhat tortured explanation since it involved stripping out the effect of the cash-for-clunkers program. And it just made me think that the reporter was searching for an "explanation" that would be easy for average listeners to understand.• Too-big-to-fail (TBTF) banks. This is the idea that since the U.S. stepped in with $23.7 trillion in various cash contributions and guarantees to protect the biggest banks, investors realized that those banks would survive no matter how bad things got. This forced investors who had bet on those big banks going bankrupt to buy the stocks frantically to cover their short bets. TBTF may be good in the short term, but it's really bad in the long term since it rewards bad behavior.
• The market is forecasting an improving economy. This idea seems to be very popular. For example, The Washington Post points out that with unemployment so high, the Dow's 53 percent rise since March 9 is getting ahead of the economy. As I've posted, I agree that the economy is weak and could double-dip (this even before we're officially out of the current recession). But why people think this is connected to the stock market is beyond me.
• Better than expected earnings. This is generally a very reliable explanation for why stocks go up or down. As I posted in 2006, if a company beats estimates and raises guidance, its stock is likely to rise. And more importantly, if it misses estimates or lowers guidance, it is sure to plunge. Unfortunately, average investors can't play this because they don't have any way of knowing ahead of time what a company will actually report.
• Weak dollar. Recently, this has been a pretty solid trade. There appear to be many traders who are betting on a declining dollar and then buying commodities and/or commodity stocks as a hedge against the resulting inflation. Companies that get a big chunk of their revenues outside the U.S. also benefit from this trade.
Of all these "explanations," the weak dollar one seems most useful now. It suggests that big traders will keep shorting the dollar and going long on commodities. As I posted, some analysts expect faster revenue growth in energy and materials stocks, so those might be a good place to look. But in exploring particular stocks, it pays to compare their Price/Earnings ratios to their rates of earnings growth. If this so-called PEG ratio is less than one, the stock may be a better buy.
Of course, since so-called flash-traders -- whose computers get access to orders and trade a split-second ahead of them -- account for 70 percent of the market volume, all these bets are somewhat suspect.
And, according to The Washington Post, individual investors have not participated in this year's rally. They pulled $205 billion out of stock funds between September 2008 and the end of March 2009, when stocks began their rally -- at the same time, they poured $357 billion into money-market funds.
I would not be surprised to see some of those billions going back into stocks now. But I hope those small investors are not getting in just as the smart money exits.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 2)
10-15-2009 @ 6:50PM
RJ said...
Get back into stocks! This is a "Suckers Rally". They are trying to get the little guy ( you and me) back into the market with all our fresh meat savings and money market accounts. Then the vultures are going to strike and wipe what is left of middle Americans lifetime savings. Pleas do not fall for this ploy. The banks such as JP Morgan Chase is like lion waiting in the tall grass waiting to pounce.......
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10-15-2009 @ 10:02PM
mike said...
Where the double bottom, all bear markets end on the big w. then there will be bargins. you don't make money by working.
10-17-2009 @ 7:21PM
TMS said...
R.J. YOU ARE SOOOOOOOO RIGHT ON!! THANKS FOR TRYING TO WARN THE MASSES....IT IS THE AVERAGE HARD WORKING AMERICAN WHO PUTS THEIR HARD EARNED DOLLARS INTO THE MARKET ONLY TO HAVE IT DIVE AND LOSE EVERYTHING WHILE THE "INSIDERS" --- AND THEY ARE WORKING RIGHT THERE ON WALL STREET --- BAIL OUT LEAVING US TO LOSE EVERYTHING!!!
10-17-2009 @ 10:21AM
cessnatx said...
You can't be serious...The Stock Market days are over....With Obama turning us into a bunch of government dependent zombies and giving away business as fast as he can for brownie points and future pocket money (well Clinton did the same thing)..I would not trust 50 cents to the DOW bunch...and bunch of crooks now led by a Liar and a Criminal...yes a criminal who puts his thumb to the law and scoffs at the truth every time his smooth lubricated mouth opens...This country is going down the tubes folks...If it recovers from Obama it will only be a miracle..and I do mean miracle from God...Meaning alot of people better get on their knees....
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10-17-2009 @ 10:41PM
pod guy said...
Now, now; go back to your medicine cabinet and pull out the anti-depressants and some ambien and have a nice nap. Hating on Obama and the rest of the Democratic party (Clinton bashing too) must take a lot of energy. Of course, it doesn't surprise me with all the vitriol in the commentary that you didn't lay any blame to politicians on the other side of the aisle. No sir-ee, the Republicans are immune from doing any harm to our great nation. As for me, I think that any politician that continues to allow wall-street bonuses unchecked is just as guilty; just IMO.
10-17-2009 @ 10:33AM
rob said...
the time top buy was when it was at 6500, too high now. prob was at 6500 no one had thecash to buy
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10-17-2009 @ 10:56AM
carlos said...
Tme to buy? You've got to be kidding! With an s&p 500 pe of over 140 and a peg in the double digits. This is a bigger bubble than the dot com era.
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10-17-2009 @ 4:36PM
Dallas said...
It's a classic "no brainer" to buy equities when the prices are depressed and falling. Likewise to sell when prices are considered rich. It appears that most of the posts here are doing it totally backwards. I keep 29% of my investable assets in the market at all times. When the market falls, I must buy more shares. When the market rises,I must sell off shares. Further, no matter what happens, I hold a large amount of cash and bonds between me and the wolf. It's simple and it always works.
10-17-2009 @ 11:23AM
Ron said...
After getting stung the first time, I don't beleive the the public will ever trust the stock market again, only the people that are stuck into it by laws prohibiting taking the money out will be in it, forget about the middle class ever doing it again. We learned a lesson, no amount of adds, TV commentators, publicity is ever going to lure us back into a trap again.
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10-17-2009 @ 11:59AM
timoth said...
Its an excellent time to buy....CHINESE//....stocks
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10-17-2009 @ 12:18PM
Buddy said...
Wall Street is done fleecing me. I will never stick any money in a publicly trade stock!
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10-17-2009 @ 12:39PM
Mike said...
They crashed the mortgage industry on purpose to move white mortgage holders out of their homes in white neighborhoods so they could integrate trash into the white neighborhoods Yes they tripped those white mortgages out on purpose. They attacked every key infrastructure to bring down the economy for control for the purpose of wealth re-distribution. Don't believe me? Have a read.
http://www.rooflines.org/1227/reading_the_tea_leaves_how_obamas_hud_transition_team_might_reshape_housing
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10-17-2009 @ 12:50PM
Mike said...
Don't for get to click on the "Three-City Study of the Moving to Opportunity program". It was their model for integration expansion out into the middle class suburbs as an attempt to reduce crime congregated in the extreme lower income hoods.
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10-17-2009 @ 1:06PM
Mike said...
Look for Barrak Hussein Obama and the DNC to bring mafia and a protectionist program to your neighborhood.
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10-17-2009 @ 1:08PM
Butch said...
Not while billionaires are getting busted for inside trading...
Its dirty
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10-17-2009 @ 1:21PM
MrDoughnut said...
It's time for the stock SOBs to jump from their perch or pedastals so the brooms and mops have something to clean up.
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10-17-2009 @ 2:05PM
jake said...
With Bernie Madoff Crime Family still intact and criminial billionaires perfroming insider deals with stocks like IBM it is not safe yet. We need to see some MAJOR PRISON time and HUGE HUGE FINES for the criminals first.
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10-17-2009 @ 3:06PM
dave said...
One thing for sure this recent downturn in the markets has shown that the so called expert advisors have been basically clueless as to when the market would improve. They have a 50% chance of being right or wrong and any investor must use their own common sense and not depend on others. If you did not have the stomach to reenter the markets to some degree in the early part of Apr 2009 you already paid a hefty price and if you are still hesitant you may continue to flounder for months. The U.S. economy is a very strong resilient entity and this must always be kept in mind despite any downturn.
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10-17-2009 @ 3:15PM
Bothepro24 said...
With Obama's elimination of the middle class, and the fact there are no jobs, or those with jobs have taken pay cuts, who wants to participate in a corrupt system. To invest in the market is no different than buying a lottery ticket. And that translate into not many winners. The true consumer (the middle class) has been defeated Obama. The only one left to play are those with tarp funds, and those who by law or taxes has to stay in the market. I used to enjoy following companies and earning and such, but as I learned more it seems the entire system is nothing more than a shell game or better yet 3 card monte.
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10-17-2009 @ 10:49PM
pod guy said...
Please explain how Obama has 'eliminated' the middle class while being president for all of 10 months? Time to turn off Glenn Beck and do your own research; the economy and the financial system were broken last year; during Bush's tenure (I'm not blaming him by the way) because of greed, inept rating agencies which should be eliminated (good bye Moody's, S&P), and the ineptitude/ incompetence and negligence of oversight (which was due in part to folks at the top which created this environment). If things don't continue to improve and more folks go into bankruptcy then perhaps there may be a day in the future where we revisit 'class warfare'.