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COMMENTARY ARCHIVE: MAR 2, 2009

Stock Market Sale 50% Off

Today is another brutal day for the stock market. As I write this, the Dow Jones Industrial Average is down 230 points, over 3%. Last week the Dow lost 300 points or 4% of its value. On October 9th, 2007, the Dow stood at 14,164; as of 10 AM today it is 6,830. That's a drop of over 50% for the most famous stock market index. The broader S&P 500 has done slightly worse over the last fifteen months. Even Berkshire Hathaway, managed by Warren Buffet, who many consider to be the world's wisest investor, has seen shares of his company decline by over half.

What bothers me even more is that both these averages are below where they were 10 years ago. I used to say that the stock market fluctuates over the short term, but if you hang on for ten years it is highly unlikely that you will have less money than if you put your money in a bank account. I based this comment on stock market history going back to the 1930s. I don't say this anymore. So, should you take your money out of the stock market now? In general, I think it's best to hang in there unless the market is driving you crazy or if you will need the money soon.

If Nordstrom's was having a "50% OFF Sale" the freeways would be gridlocked, assuming that the products on sale were the same products that were double the price 15 months ago. So, are companies whose stocks are traded on the stock exchange worth half what they were then? Financial companies are worth dramatically less after their credibility vanished and the taxpayers became co-owners. Citibank closed at $1.50 today. Two years ago its share price was $50.

However, if you look at the most famous technology, drug and retail companies, are they that much different? Their sales are certainly down and many have laid off employees, but they are still the dominant firms in industries that are unlikely to disappear unless we devolve into a bartering society.

I'm not currently optimistic about the stock market, but I don't believe we are on the verge of total economic collapse either. If (I used to say "when") the stock market does turn around, I believe that relieved enthusiasm (or greed) will quickly replace fear and spark a dramatic market rally. This may be years away, but it could be soon. I don't know. No one knows, even the guys behind the curtain.

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