Riding the Stock Market
By Bob Rose
The market goes up; the market goes down. American investors have been spoiled over the last eight years with a market that continually reached higher and higher peaks. On August 31, 1998, we saw the DOW drop like a stone--513 points. That's a big drop and we may well be seeing the beginning of a bear market, but we really need to take a deep breath and try to see where we are at this point. The market had gone well past the point of investors investing in American companies hoping for an above average return on their investment, and was rapidly developing a casino-like attitude where gamblers were calling the shots. I am big on looking at the basics and when stocks, Wal-Mart, for example, has a PE of 39 to 1, even Sam Walton would be reluctant to buy. PE is merely price to earning ratio which means that if the company continues on its present earnings rate it would take you 39 years for the dividend to pay you back the price of the stock. A stock was considered a reasonable buy with a PE of 10 to 1.
The market was well overdue for a correction, and it has certainly done that; all the indicators were there that should have warned us, but a correction is no need for panic. We really need to assess our individual situations. If, for example, you are expecting to retire or are already retired cashing in the big gains you have made in the last eight years may well be right for you since you won't have a lot of time to build back substantial losses should the market continue to fall. Now if you are young with a 401K with 10 years or longer until you need your money then you might consider riding it out. After all in your situation a lower stock market price could result, and if you continue your investment strategy it might produce some good buys. Remember that if you had invested $1000 the day before the market crash in October, 1929, shortly you would only have had $500 remaining, but if you had remained in the market and continued to buy stock over the next 20 to 30 years you could have retired with a substantial retirement income.
There have been some real changes in our economy, and I feel for the better. First, Americans now have IRA's and 401K's and are saving like they never have before. All that money has to go somewhere and maybe not tomorrow, but eventually, that will flow back in to stocks. Also all around the world markets are down and when things get better, and we all hope they do, money will first flow back to the American market. American companies are still making money, inflation is almost non-existent, and interest rates are at historic lows. This all points toward a market rebound in the future. The market was just overpriced and the correction was bound to come.
Right now I would not get back into the market until I was sure the correction had run its course. PE's of 10 or 12 to 1 would be one good indicator. CD's not only look good now but have not been a bad place to be all along. With interest rates at about 6%, a resulting 4% return on investment in real dollars is not bad. For example, today CD's are much better than in the Carter years when investors were getting 8 to 10% on CD's but had inflation at 10 to 12%. In that situation you were actually, in real dollars, losing 2% or so. Government was actually causing you to lose purchasing power, and our standard of living was going down each year.
If you don't have stocks, CD's look very good to me, and if you have been in CD's all along, you have done quite well. Bonds are another kettle of fish. You run risk there similar to the stock market since you run the risk of losing a lot of capital if interest rates increase and you have to sell them. Today your chance of making additional money on bonds is much less since interest rates are already at historic lows.
There are some who feel that this is much more than a mere market correction, and that with Y2K still to come and global markets, such as Russia, not just going south but jumping off the earth, that we must start preparing for conditions similar to, if not worse, than the 30's. I am not there yet but realize that we certainly haven't acted like a nation worthy of God's blessing. Should this come to pass, and it certainly could, then there will be lots of indicators before it actually happens and there is a lot we can do to take protective action.
The most important thing we should realize is that as a nation we should return to God in prayer and to the belief that He will provide for His children--He always has and He won't let us down this time. Non-Christians who put their trust in material things are now fearful. Christians, on the other hand, can rest assured that their strength and security remains both strong and consistent. Our security does not depend on worldly whims and remains forever as long as we stay true to the only real security in this world--our Lord and Savior, Jesus Christ.