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Home > Personal Finance Articles > Market Sells Off 3%
Market Sells Off 3%
February 28, 2007
Growth Investments
The market took a step back last week (a small one after Friday) amidst growing
concern that the Federal Reserve would not be making an interest rate cut anytime
soon. The domestic economy is looking strong enough to withstand a fed reserve
stance that does not include interest rate cuts and foreign governments are bumping
their interest rates against a strong worldwide economy. These stances have sent the
10 year treasury yield from 4.64% a month ago to 5.12% on Friday. Higher interest
rates hurt this bull market because the market expected lower rates before higher
ones. Some notes on the effects of higher interest rates to this market:
1. Higher rates reduce return numbers on leveraged buyouts which have buoyed
this market recently
2. Higher rates make bonds more attractive to large money players, such as
pension funds
3. Higher rates exert pressure on the consumer to purchase more goods,
therefore hurting corporate profits
4. Higher rates pressure corporate profits by increasing interest and borrowing
Ah, today was another big losing day in the financial markets. These days always remind us how important it is to keep our eyes focused on the long term, and not to get ourselves wrapped up in the day to day movements covered so in depth by our friends at the national news sources. Some may argue that the 2000-2002 periods of equity losses was some of the worst losing investing periods in their lives. Here are the recent history numbers as of the close of 2006, which is where yesterday’s correction took us back to.
S&P 500 (annual avg returns)
5 Year 6%
10 Year 9%
15 Year 11%
We believe yesterday’s pullback was a short term blip in the radar stemming from a number of factors.
• China’s 9% retreat in yesterday’s trading
o China’s 9% drop came after a 13% rise in the previous 6 sessions. Investors were realizing some gains that have been great over the last 2 years. Let’s just note that China sneezed yesterday and the rest of the world just caught a chill, not a cold.
• Greenspan’s comments over the weekend regarding a potential recession in the US markets.
• Everyone’s waiting and calling for a short-term pullback.
o Most market participants have been calling for a 5% short-term pullback
Long-term we are positive on the worldwide economy, which with a diversified portfolio should yield quality investment returns. We do face some challenges in the US with slowing corporate earnings growth, a current complacency in the markets, and recently rising oil prices. All this said, the positives in the economy outweigh the negatives including a low inflation rate, generally low interest rates, decent equity valuations, and a booming global expansion.
Overall, let’s remember to properly diversify, buy high quality investments and understand that investing is a long term proposition, and we must learn to block out short term noise.
Mitchell Reiner
Certified Financial Planner
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