Sunday, December 2, 2007
In a single week, the stock market managed both to rouse fear and inspire hope.
On Monday, the Dow Jones industrial average plunged more than 200 points, sliding past the 10 percent threshold marking an official correction from its October peak. Talk of recession intensified. But two days later, the market rallied, soaring more than 300 points to its biggest one-day percentage gain in at least four years.
The wild swings agitated investors. Should they sell their stocks? Should they move to less risky bonds, certificates of deposit and money-market funds? Or should they sit tight and ride out the turbulence?
"When everything is uncertain, you just don't know where to put your money," said Michael Fekete, a Northwest D.C. resident and technical editor who has about $350,000 in stocks, bonds and other investments. "Where do you hide?"
Wall Street is bracing for an even rockier period of further deterioration in credit conditions and the housing market. The dollar remains weak and oil prices high. Poor corporate earnings are also dogging the economy. A second consecutive quarter of declining profits could lead to an "earnings recession," which some analysts say could prompt staff cuts, driving up the unemployment rate and further dampening consumer spending.
"These times are very volatile, so it is scary . . .," said Rita Cheng, a financial adviser at Ameriprise Financial Services in Bethesda. "Investors have every right to be nervous. The advice that I give to clients is you don't want to panic."
Still, Fekete, one of Cheng's clients, recently dumped some poor performers from his portfolio. He is not ruling out more changes but said, "I think we're just going to sit tight right now and see how that does."
He's not the only investor doing some serious soul-searching these days.
Money has flowed out of domestic stock mutual funds each month since May, according to AMG Data Services, an investment research firm specializing in mutual funds. So far in November, about $10.6 billion has fled such funds, compared with $3.6 billion in October. The money shifted mostly into international stock funds, especially those investing in emerging markets, said Robert Adler, president of AMG.
Bespoke Investment Group provides another window into investors' psyche with its research on analysts' ratings of stocks in the Standard & Poor's 1500 index. Large-capitalization stocks -- those with the highest stock market value -- had the highest percentage of analyst "buy" ratings, at 49 percent, and the lowest percentage of "sell" ratings, at 6 percent. Financials, which include lenders suffering from the subprime mortgage crisis, had the least amount of buy ratings, at 36 percent, while energy stocks, buoyed by rising oil prices, had the highest, at 54 percent.
"These are the times when investors ask: 'Do I turn left? Do I turn right? Do I stand still? Do I jump? What do I do?' " said Georges Yared, chief investment officer of Yared Investment Research. His answer: "You have to go back to the basic fundamentals. For any stock I own, why do I own it? What is the price target? Defend the price target and defend 'Why do I own it?' "
In other words, how do you go about protecting your portfolio when the dreaded R-word is being bandied about so much?