What a rally we’ve had in the stock market this summer! For those of you who read my May 10, 2009 blog article, you know how I feel about what’s going to happen next. The market can’t continue to increase at this pace!
The question is not whether a correction will occur, but when it will occur and how much of a correction will there be? From my May 10, 2009 “Recent Stock Market Rally” post to now, the market has gone up further and faster than I expected it to. In my opinion, this only means that it now has further to fall!
No one has a crystal ball, and although we can’t know for sure what will happen next, there are reasons that I believe (still) that the market is in for another correction. This doesn’t mean that I don’t believe the market won’t ever recover. Of course it will recover! I just believe that we are in for another big correction before it recovers. And I also believe the market will take longer to recover than most people think.
Here are four reasons why I believe another correction is inevitable:
1. The Dow Jones has increased 42% and the S&P 500 has increased 48% from their previous lows in March 2009. This is a tremendous run! Logically, if something goes up fast, and then a little faster, and then really fast, what is likely to happen next?
2. According to CNBC, “the summer’s rally was driven in large part by institutional investors and traders…” According to Don Bertrand, vice president of WealthTrust-Arizona in Scottsdale, “There’s still a large amount of cash sitting on the sidelines because people haven’t believed that this rally is for real.”
All this money sitting on the sidelines earning next to nothing and the market has just gone up nearly 50%! Maybe I should jump in! Wrong! Don’t do it! How much higher can it climb? The stock market can wreak havoc on your emotions, tempting you to do something rash. Don’t allow it to play with your emotions.
3. Unemployment is still on the rise. According to the Department of Labor, “in August, the number of unemployed persons increased by 466,000 to 14.9 million, and the unemployment rate rose by 0.3 percentage point to 9.7 percent.” Furthermore, according to Dean Baker, a director of the Center for Economic and Policy Research in Washington, “We’re likely on a path toward more than 10 percent unemployment.”
What the media doesn’t tell you is, if you’ve been unemployed for over a year, you no longer count in their statistics! Thus, the number of jobless individuals is actually much higher!
4. Underemployment is on the rise. The media does a poor job of covering this topic. Someone becomes underemployed when they become employed in a capacity that is less than what they are used to. A jobless executive who used to earn $80K per year but is now working for $40K is considered underemployed.
You may be asking just how bad the underemployment market really is? This is shocking! According to the New York Times,”…the so-called underemployment rate hit 16.8 percent last month. That’s the highest such rate on records dating to 1994.”
The conclusion? Over 25% of the entire U.S. work force is unemployed or underemployed. Wow! What does this mean to you? For those of you who still have your money on the sidelines or have placed your money in safe investments, I wouldn’t change much and I definitely would not put any of it into the market.
For those of you who still have money in stocks, remember a few months ago when the market and your portfolio were down nearly half and you promised yourself that if you ever get your money back, you were going to get out? Well, now is the time! Don’t try to time the market. When it does correct, it usually corrects fast and you don’t want to wait until it’s too late.
As a final note, the above information is my opinion. Please don’t go out and act on what you have read until you do your own research or discuss your situation with your own financial advisor. If you are already a client of Providence Financial and would like us to review your situation, please don’t hesitate to call us at (818) 887-6443 to schedule an appointment. If you are not a client but would like to discuss your situation further, please call us to schedule a FREE FINANCIAL PHYSICAL.