Bob,
I appreciate your link regarding Solamon Brothers views on the market. We can all benefit by considering a full range of opinions, in addition to facts and well-reasoned arguements, in formulating our investment strategies and tactics. We should, of course, consider the source of those opinions. Is the source qualified? How accurate has the source been in the past? Is there any supportive or contrary evidence?
One thing about the source of this opinion makes me a bit skeptical. Solamon Brothers makes more money when more people buy and sell more often. They don't have to forcast accurately, just generate enough uncertainty to get people to trade. We also need opinions of others who don't have quite so much to gain by claiming, "The sky is falling." I think it was irresponsible of Solamon Brothers to raise the 1929 spector. There hasn't been the same extreme increase in stock prices; We don't have everyone buying stocks on 90% margin; the Fed would expand the money suppy today, in the 20s and 30s they reduced it; etc.
I will be very surprised if the market retreat ends tomorrow. I think many have concerns about the fact that stock prices have greatly outrun growth in sales and earnings. I believe that the correction will continue for days or weeks, depending on the rate of the correction. I have no idea where the correction will end. But, IMHO, there have been structural changes in the economy that are very healthy and support continued economic growth at a relatively high rate. Two of these structural changes are the increases in productivity resulting from the application of advanced technology, and the increased linkage of our economy to rapidly growing economies in Asia.
IMHO, stock prices have increased beyond the increase in sales and earnings for several basic reasons: 1) The drop in inflation gave people more discretionary money--many invested it in stocks and mutual funds; 2) Increased publicity about the long range value of Social Security to retirement income motivated people to invest more; 3) Interest rates for savings account deposits and money market accounts have declined. Basically we have more money flowing into the market, driving prices up. As people pull money out, stock prices will fall. As they put the money into savings and money market accounts, those rates of return will fall below today's levels. In the long run, stocks are clearly a superior investment.
Respectfully,
Jack |
