An Overdue Correction or the Beginning of Something More?

Global stock markets plummeted midday today with the Dow Jones Industrial Average declining nearly 1000 points before rebounding to close down 347 points. Today’s volatility was tied to a number of issues but was mainly focused on Greece’s national debt crisis. There is also a rumor that a large institution made a trade error – rather than selling “millions” of dollars worth of stock, they accidently sold “billions”! This type of short term, turbo charged, volatility can rattle the nerves of even the most seasoned investor. Investors need to ascertain if today’s market action is an overdue correction or the beginning of something much worse.

In our view, the global economic recovery is still intact and is unlikely to be derailed by the problems associated with the Greek debt crisis. Anyone who invested during the 1990’s should recall the numerous national debt crises that plagued Latin America, but did little to derail global economic growth. In hindsight, these events were similar to today’s. Stock prices dropped significantly and then rebounded. Interestingly, the crisis in Greece and Europe is not new information so one has to wonder why everyone decided to panic today. This leads us to another, more plausible explanation for the recent market weakness over the last 5 trading days which culminated to today’s big decline - we were simply way overdue for a market correction. Stock prices had advanced 15% from the lows in January which is above normal absent some sort of pause or pullback along the way. If this is a correction in stock prices and nothing worse, one should expect stocks to continue to be volatile and continue to pull back. Keep in mind that a normal stock market correction is about 7-9% – about where the market was at its lowest point today.

There is a possibility that today’s weakness is the beginning of something worse, however our research suggests otherwise. If this is the case, keep in mind that we continue to employ the use of stop loss orders to mitigate “catastrophic” decline. Interestingly, only a handful of stop loss orders actually were executed today. A further decline in stock prices - beyond today’s lows - would trigger significantly more stop loss orders and further reduce your exposure to stocks. We don’t believe that this is likely, but we are prepared if this comes to fruition.

We hope this short note is helpful during this volatile period. Keep in mind we will be watching the situation very carefully on your behalf.

Sincerely,

James E. Demmert
Managing Partner