Investment banks have all but vanished from Wall Streets, giant corporations like AIG, Big 3 Motors, and even GE needed rescue package and loans from the US government, the world stock market has lost between 30-50% of its high. Recently, market starts to recover from its low, and from 1st day of 2009, there seems to be some signs of bull market raging on.
Should we hitch the bull ride?
We all know that stock market is forward looking, and when market indicators show signs of a recovering market, it will be too late and you would have already missed out. The time to buy is when things still looks dark. However I personally do not think the market has reached its bottom yet.
The biggest obstacle that the market faces right now is economic uncertainty. Nobody knows how long this recession will last. If it is to follow 2001, it will be a short one, but right now, it looks more like it will follow the deep and prolonged recession as in the 1980s.
2001 recession is triggered by external factors, it has nothing to do with consumer demands. Our current recession, though started off as a mortgage crisis in US, sparks off a chain reaction, starting from banks down to corporations, and down to consumers like you and me, and this is a world recession, not just the more simplistic Asian Financial Crisis.
The start of a bad quarter for corporations are only in the 4th quarter of 2008, and consumers have only started to tighten their belts a few months back. There can only be more bad news of more companies filing for bankruptcy and job cuts.
The next 6 months will show unemployment peaking in many countries, and more bad news from companies. In fact, the upcoming US Labor Department report will likely show an unemployment rate of 7% -- the highest it's been since 1993 -- according to Bloomberg. Also, Ford Motors (NYSE: F) announced a 32% drop in revenue during December, along with plans to reduce their North American workforce by 10%. Ford is in good company, with Merck (NYSE: MER), Goldman Sachs (NYSE: GS), Whirlpool (NYSE: WHR), and Yahoo! (Nasdaq: YHOO) also recently announcing layoffs.
In addition, on other fronts, the ISM November manufacturing index has fallen to its lowest level since 1982, and the service sector has fared little better. The services index, which accounts for roughly 80% of U.S. economic activity, fell to its lowest reading since its creation in 1997. Consumer spending has fallen off a cliff as worried families retrench and prepare for the worst.
Another indication that the market is not showing any sign of settling down soon is the incredible level of volatility we've encountered in recent months. While the CBOE Volatility Index -- aka the Wall Street fear gauge -- is down significantly from November, it's still pretty much off the charts. Historically high levels of volatility are a good indication that we haven't worked the panic out of the market just yet, and that further declines may be in the works.
Consumer spending accounts for 70% of US GDP, and consumer spending has not yet reached the bottom, and the core problem of this crisis, housing prices, has not stopped falling. Thus I believe more bad news will emerge and things will get worse before it gets better. Economic data will continue to disappoint and we will see new lows of stock.
I may not be right, thus if you have loads of spare cash, it doesn't hurt to start accumulating now, especially blue chips, in case I'm wrong and got blamed for causing you to miss the cash boat.
