What is Going on in the Stock Market!?

What is Going on in the Stock Market!?
by Richard P. Halverson

Will It Ever Be Safe To Invest Again?

Some years ago Elder Boyd K. Packer called me to serve as a stake president. He gave the new stake presidency much wise counsel. One thing he said stands out in my mind. “Be steady when the wind blows.” He said.

“Be[ing] steady when the wind blows” is good advice not only for stake presidents but for parents, married couples, single people, Church members, citizens, employers, employees, investors and everyone else in life.

The stock market is cyclical. It always has been cyclical. It always will be cyclical. What it is going through right now is just part of normal cyclicality. The news surrounding the cycles may change. And this cycle is making a lot of news. But it is still part of a normal cycle.

In some ways the market is like the weather. Recently, I was listening to reports of floods in Texas and droughts and fires in Colorado. A few years ago I remember the drought in Texas and the floods in Colorado. Some see these as apocalyptic events. But more than likely they are just normal weather cycles. Modern news dissemination brings this disaster right into our living rooms then focuses on the most severe examples of the crisis. It is easy for millions of people to feel frightened when the event is actually affecting only a few hundred. Please do not misunderstand me. Our hearts go out to those whose lives are directly in the path of the fire or flood. But perspective and steadiness are wise for everyone.

The bear market cycle we are now experiencing in stocks is what naturally follows a bull market cycle like the one we were experiencing a few years ago. Indeed, as a bull market cycle that one was extreme. It was extreme in terms of its length, in terms of its rise and most important it was extreme in its amount of speculation. In my opinion it will be recorded as one of the greatest speculative blow-offs in history. (A little investor jargon there but I’m sure everyone gets it.) A little over three years ago I wrote an article for Meridian talking about some of the speculative excesses we were witnessing. At the time we had reached such a DOT.COM frenzy that earnings had almost become a sign of management weakness. That seems irrational now and it would have seemed impossible three years before that. But it happened. The same emotions that run things up in a greed driven bull market run in reverse during a fear driven bear market. Both extremes can cloud good judgement and cause investors to topple in the wind.

The following chart is the best single graphic I have seen of what this cycle has been like.

Source: Great Northern Capital

A little explanation is in necessary. The Russell 2000 and the NASDAQ Composite are both stock market indexes. The Russell 2000 measures the smallest two-thirds of the largest companies. The NASDAQ Composite is an index of all stocks traded on NASDAQ stock exchange which is essentially the over-the-counter market. Historically, small companies were traded on the NASDAQ. Historically both indexes were considered a good measure of small stock performance. However, there are some substantial differences in the two. These differences meant that while the Russell 2000 would measure the DOT.COM/Technology speculation to a degree the NASDAQ would reflect it all. For comparison I have set both of these indexes to equal 100 on December 31, 1980 in the chart above.

For many years these indexes ran almost parallel as expected. Then the NASDAQ began to pull away from the Russell 2000. Eventually, it exploded as the DOT.COM/Technology speculative craze moved into full swing. Many speculators made billions in paper profits. Today the NASDAQ has almost retraced its ground to its original parity with the Russell 2000. With this retreat has been the loss of billions of dollars of market value for many of the same investors.

What we are now seeing is the other side of the speculative bubble. If you will remember I think you will agree speculative fever was everywhere. It ran from the Wall Street stock analyst with her recommendations to the cab driver with his stock tips. From the board chairman with his options to the mail room clerk with her 401k. The speculative winds became so intense that some small investors toppled. They plunged their investments into technology stocks right at the worst time. The same speculative winds became so intense that some top executives toppled. They plunged their corporations into risky businesses right at the wrong time. Most of these bad decisions have probably already been identified by the market and punished severely. In some cases executives tried to cover-up bad decisions with worse decisions – even illegal decisions. These are now in the headlines. In my opinion most of the corporate wrongdoing we are now hearing about is just part of this cycle. In fact, this is the type of news that tends to come out late in the cycle rather than early.

An editorial comment. I believe the fear and greed emotions we see driving this cycle affected people from top to bottom. Where an executive or anyone else has broken the law, that person should be held accountable. But I am offended to hear of numerous cases where small investors driven by a greedy desire to get rich quick borrowed against their houses and credit cards and plunged into poor investments. Now some of those people want to blame the broker, the analyst or the CEO and be reimbursed. Investing is not risk free and there is nearly always a price to be paid for unwise speculation.

In the opening I made the point of steadiness -- steadiness when the wind blows. I tried to indicate this is important in all aspects of life as well as investing. Allow me to try to make some simple analogies of steadiness in investing and steadiness in the Church.

STEADINESS WHEN THE WIND BLOWS	INVESTING	CHURCH
1. Have a solid foundation	· Avoid excessive debt · Responsible spending · Live within your cash flow so that investing is for the future.	· Solid testimony · Live the commandments
2. Maintain perspective in the ups and downs	· Long term financial goals · Things are rarely as bad or good as they seem at the moment	· Long term view of eternal progress · Things are rarely as bad or good as they seem at the moment
3. Be well informed	· Learn about your investments. · Understand how they make money. · Understand their risks and rewards.	· Learn all you can about the Gospel. · Study the scriptures and the living prophets.
4. Be diversified	· Avoid excessive concentration in one investment. · Use stocks, bonds, and real estate something will usually be doing well when other things are doing poorly	· Avoid concentrating all your testimony or religious satisfactions in a single calling, Church program or person.
5. Be constant	· Make regular contributions to your investments in good and bad times	· Make regular contributions to your spirituality in good and bad times.

Some analysts are telling us that recent corporate scandals are responsible for recent declines in stock values. A little perspective is in order. Many stocks were substantially overvalued. If it hadn’t been corporate scandals some other news would cause stocks to decline. Further, as with a flood only a few are effected. The news makes it seem like every company in the world is cooking the books. There are over 8,000 publicly traded companies. At this point less than two dozen companies seem to have serious accounting questions. Of course, our hearts go out to those who are directly in the path of the disaster.

Please note this article is not intended to predict where the bottom of this particular cycle will end or to advise you on when to invest. It is only intended to point out that being “Steady when the wind blows” is wise counsel in all we do.

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