Stocks had their worst day Tuesday (with the Dow Jones Industrials shedding 2.9%) since February 2007. The Dow is down almost eight percent so far this year. And considering we are only 38 days into the year, 2008 is looking like the financial year many investors and business people hoped would never happen.
The bear has not been pleasant so far in 2008. And two things surprise me about that: first off, talk of recession is everywhere. Hence, if we are going to have one, it will be the most well publicized recession that I remember, contrary to most recessions that just sneak up on investors.
Secondly, I see the Fed more in a panic than I see investors. Our phones are not ringing off the hook with worried investors. As for the stockbrokers, they tell me the clients were calling more in January than they are now. Are investors just accepting falling stock prices and just waiting to ride it out? That’s what I see.
But there must always be a scapegoat for the classic bear market for Wall Street to hang their coat on. On Tuesday, it was easy to blame the unexpected slump on the U.S. service industry. The Institute of Supply Management business activity index for the service industry fell dramatically to give a reading of 41.9 — anything below 50 is considered economic contraction. This is the first time in five years that the index has fallen below 50.
The next big problem in the housing market? Empty homes. According to a recent report from the U.S. Census Bureau, almost three percent of all homes for sale are sitting empty. This is the highest level of empty homes since the Bureau started keeping statistics in the mid-1960s.
Car loans are the next type of loans you can expect consumers to start defaulting on. GMAC came out this week and said that it had a loss of seven hundred and twenty-four million dollars in the fourth quarter. If you can’t pay your mortgage, paying auto loans could be just as difficult.
My best advice, or should I say opinion: cash, gold stocks and special situation small-cap stocks. Common sense dictates that economic booms (like we had) are followed by economic contractions (like we are facing now). Opportunity is presented during bad economic times, as stock prices decline eventually, presenting good bargains. As the market falls, not only are big-cap stocks affected, but so are the prices of special situation small-cap stocks — making the right ones even better bargains.