As economists ponder whether the economy is headed for a “double dip” recession, the stock market has had a rough couple of weeks after which the DOW settled to about where it was at the beginning of the year. The DOW is currently hovering around 10,000, and will likely not return to 14,000+ levels, last seen in 2007, anytime soon.
The DOW dipped below 7,000 about a year and a half ago, in March of 2009. Back then a global meltdown felt like a reality as financial markets were still coming to grips with the exit of a number of major financial players. And economic reforms were likely on the way, but nobody knew what they were going to look like.
When the DOW recovered some lost territory to boost itself back above 10,000, many took this as a sign that the economy was on the road to recovery. Usually the stock market recovers before the broader economy on main street. Mid to late 2010, at the latest, was when the economy would correct itself, or at least that was the word on the street in 2009.
This optimism, as it turns out, was unfounded.
Concerns about a sluggish recovery, combined with record high unemployment, has lead to renewed jitters about where the market, and the broader economy, will go from here. Fall months such as October are notoriously bad for the stock market, meaning that a major decline of perhaps 15% is a real possibility. Will it happen? While I am not an investment specialist, and wouldn’t want anybody to base investment decisions on what I say, I would say there is good reason to believer that the stock market will do well over the next fiscal year. These reasons are:
1. It’s hard to imagine the unemployment situation getting worse than it is. Though this could happen, hiring may well pick up this next year and this could help restore confidence in the market.
2. While the light at the end of the tunnel may be hard to see, many economists feel that we are at least “halfway through” the worst of the economic recession. The stock markets usually place bets based on short term prospects, and the sentiment that the economy is slowing moving in the right direction helps.
3. While institutional investors are busily looking for signs of trouble in the current economy, this means that they will pounce on good information as well. Normally such a hyper-reactive stock market is a bad thing, but the economic news can only get better and this will benefit investors.
4. Historically speaking, the stock market is still a good investment. However, as a person grows older a smaller percentage of their portfolio should be in stocks in order to buffer major fluctuations in the stock market. For the long term investor there has probably never been a better time to invest, and as the economy continues to stabilize, even if it doesn’t markedly improve, these investors will move their money into stocks over the next couple years.
Where will the DOW close at in January 2011? My guess is currently around 11,000 after a better than expected holiday retail season. A modest improvement and my guess is that by June 2011 it will have rebounded into the neighborhood of 11,500.