We want to acknowledge that the almost 1,000 point drop in the DOWyesterday afternoon was quite unnerving but we do not see a wholesale collapse in equity pricing occurring. We believe that the current situation is the start of a correction that began earlier this week and considering that equity returns for the past year are better than 24% for MSCI EAFE, 29% for the S&P 500 and 33% for the DOW, it is not very surprising (see the table below). Although we are not market timers, we have been expecting a pull back in the market for sometime before we anticipate another rise.
As of this writing it is uncertain whether there was a technical glitch, as highlighted with what happened to Proctor & Gamble and Accenture shares, or if it was fear that the Greek crisis would plunge Europe into a financial meltdown as the subprime mortgages did for the United States. Whether it is or is not, we believe that with the US economy in the early stages of a recovery and with the Brazilian, Russian, Indian and Chinese economies expanding, it is not the time to sit on the sidelines. We continue to recommend you follow through with our investment strategy for your portfolios.
Outside of the technical glitch, we believe the current catalyst for today’s market meltdown was the possibility that the problems in Greece will spread to more countries because the European governments are not doing enough. I do not believe it is an accident that theDOW plummeted almost 1,000 points after Jean Claude Trichet, president of the European Central Bank, stated that there was no discussion about the stronger European countries having a contingency plan and following the steps that the Federal Reserve Bank followed when the US banking system teetered upon collapse. It was that comment that triggered the selloff, yhe belief being that the bank should be setting up contingency plans rather than being so complacent. Hopefully the bank President will take a cue from the market’s reaction to his words and start making contingency plans. That is all it would take to calm the European and world equity market.
So, as the Greece crisis has unfolded on top of the Gulf oil spill and the terrorist act in New York City, it is not surprising for the equity markets to drop. We believe this is not the end of the bull market but a correction. The correction could last anywhere from a few days to as long as sometime after Labor Day.
We are monitoring the situation very carefully and will keep you apprised of any changes. Although the volatility is anxiety provoking, we do not think it is time to change your investment strategy. At this time we recommend neither adding to equity exposure nor reducing your equity exposure.
We plan on keeping you informed as the situation unfolds.
