Show #418 Airing Sunday, 1/27/08
Right now, with the mortgage mess still playing out, views on the stock market's future have darkened. But putting things in historical perspective can help put a brighter spin on the market's future. So what can our past tell us about the present, and future? Here to illuminate us is our financial quarterback, Jim Lineweaver.
Question: It's no secret that sub prime lending has led to a major meltdown, affecting real estate, mortgages, credit markets and stock markets here and around the world.
Answer: Yes, and it's had consequences. Major financial institutions have announced write-offs in the billions, and consequently heads at some of these organizations have rolled. We don't know what the final outcome will be for the housing market, credit markets, consumers or investors.
Even though we don't know if history will repeat itself, I thought it would be meaningful to look at events of a historical nature and see what their impact was on the stock market, both short term and long term.
Question: What happened to the stock market after the bombing of Pearl Harbor?
Answer: Prior to the bombing of Pearl Harbor, the market had already been in a downward trend. After the attack, the Dow Jones Industrial Average (Dow) declined by about 5%.
The last trading day before the bombing the Dow was at 115.9, and ten years later it had appreciated to 282.06, an average annual increase, excluding dividends, of 9.3%. (We use ten years, because we feel that if you don't have a long investment horizon, you shouldn't have your assets directly tied to the stock market.)
Question: How about the assassination of President Kennedy? How did the market react them?
Answer: On the day President Kennedy was assassinated, the Dow dropped by about 3%, but recovered within a couple of days. The effect of this historical event was largely confined to the day of the assassination itself.
Question: What about an "inside" event? How did the market recover after Black Monday?
Answer: On Monday, October 19, 1987, the Dow had its largest one day drop in history, dropping from 839 to 670, a drop of 22.6%.
This severe drop was not precipitated by a single historic event. It is assumed that mass panic and a combination of program selling created this record drop in the market, which is now known as Black Monday.
While it wouldn't be until January of 1989, 15 months after Black Monday, that the Dow returned to its previous level, ten years later the Dow was at 2547.
Question: Could Black Monday happen again?
Answer: After Black Monday, the major stock market and commodity exchanges instituted what have become known as circuit breakers and other trading limits to protect the market during periods of severe market volatility.
Circuit breakers are trading halts imposed when the market drops by a certain percentage, starting at 10%, in one day. These are intended to give investors and traders time to reevaluate the market conditions and to prevent panic selling, like that which occurred on Black Monday.
Question: How did the 1997 Asian Financial Crisis affect our stock markets?
Answer: When it appeared that the Asian Financial Crisis could spread to our domestic economy, the Dow reacted by dropping 554 points on October 27, 1997; a drop of 7.2%. The next day, the market rebounded by 334 points, a record at that point for a one-day increase.
While at the time it was felt the Asian Financial Crisis could have a negative effect on our economy, our economy continued to grow, and 10 years later the Dow had just broken new ground with its first close above 14000.
Question: So what does all this market memory mean for our viewers who are investing, or would like to make memorable investments?
Answer: As we've said before, keep fear and greed out of your investment decisions. It is best to develop a long-term plan, and then stick to it through short-term changes in the market.
Investing in the stock market is not for everyone. If you do not have a long-term perspective or a long time frame or horizon (10 years), the potential risks outweigh the potential returns.
If you are losing sleep about the impact the current financial crisis may have on your assets, you should have your accounts reviewed. But if you have a strong stomach, you may be wise to stay in the market, though you may need to revise your plans based on the events in the world.
So should you cash out of the stock market during this period of turmoil? To learn more about investment strategies that can work for you during tumultuous times, give the Lineweaver Financial Group a call at the number that's next. My thanks to Jim Lineweaver.
