Market: A Couple of Observations

A reader left a link to a long article from the Boston Globe about what a modern depression would look like. My first observation was that it reads a lot like Michael Panzner’s book that I was probably the last person to read two years ago.

Amusingly it seemed less bleak than when I read most of the same stuff in Panzner’s book two years ago because things have deteriorated so much since then. Foreclosures and unemployment are way up and the stock market and GDP are way down. Given that we are much closer to a depression in terms of what is actually happening on the ground it’s like there is less ground between here and the scenario spelled out in the article and because of that it seemed less scary. I’m sure there is some sort of bias or coping mechanism that accounts for my reaction.

A couple of things I think the article missed is that people would migrate toward industries where there will be job growth which off the top would include healthcare workers, teachers and new government employees to administer the various stimulus and rescue plans.

I would also add that the idea of neighborhoods of overcrowded houses next to abandoned ones seems like more a of a micro phenomenon. Will the foreclosure rate make it to 15% of all mortgage borrowers? I have not seen any estimates that high. If, though, it does get that high that does not mean that all of those people will lose their jobs and for the ones that do, some portion (I would think a large portion) would seek out work that at a minimum left them under-employed. A couple, one of whom is a teacher, lets say, and the other a police officer, with a combined income of $80,000 that needs to go to foreclosure because of a reset of an ARM to a payment they can’t afford can probably afford to go into some sort of rental at $1500 month as neither is likely to become unemployed.

That relatively rosy scenario is not an argument for no depression but more of an opinion (or hope) that it does not alter the social fabric of the country to the extent that many people fear. If we become a nation of collectively under-employed people then clearly far fewer people would prosper but it could also mean more people can stay put without turning their homes into multi generational compounds.

Next up is this from Jason Zweig about trying to take control of your financial situation, more specifically your investments. Most of the article sounds good to me but there is one thing I would add which is something not to do (the article is a list of things to do). Markets are down a lot. This triggers various sorts of emotions. Probably the worst thing to do after a 55% drop is to change your target allocation between equities and fixed income.

Even if you think October 2007 was 1929 making a radical overhaul to your target asset allocation now is a bad idea. At some point the market will come back, no matter how bullish or bearish you are it will come back, it came back from the 1930s. Maybe it takes two years (unlikely) or maybe it takes 20 years (also unlikely) but a switch today from 70 (stocks)/30 to 40/60 can only lengthen the time you need to get back. If you are young you have the time to give it to come back. If you are 100 years old now and think you won’t be around in 20 years, less stock exposure won’t help you out from here. The 70/30 number is just an example and I realize that 100 year old investor is unlikely to have more than 5% in stocks..

The above paragraph is not about any tactical defensive moves made thus far or that might be made from here. Someone can target 70% in equities and be underweight their target. The above paragraph is about people giving up which is different than tactical decisions.

If you have learned the hard way you had too much in stocks, from a numbers stand point you are better off waiting for it to at least come partially back before going from 70/30 to 40/60 or any numbers suitable for you. Not that doing so will be any easier for you but from a numbers standpoint…

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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