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Don't panic

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by Peter Switzer

There’s a lot of talk about a correction of the stock market around right now, but the only people who should be really worried are short-term investors, day traders and fund managers who have to show their investment results every three months.

All the experts will tell you that last week was the worst on US stock market since 6 March last year when the direction of shares turned around and headed north big time.

Reasons for the sell off

The same experts will name the following reasons for last week’s share sell off.

First, there was President Barack Obama’s attack on the banks to make them safer but less profitable, at least in the short-run. That will hurt short-term share prices.

Second was the threat that Ben Bernanke could lose his job as the Federal Reserve chairman. Legendary investor, Warren Buffett, predicted Bernanke's dismissal by the Senate would hurt share prices and Buffett said he would sell stocks.

Third, there was China’s inclination to raise interest rates to control the growth spurt, which in turn will ensure an inflationary bubble won’t result.

But there is a fourth reason that cannot be left out of the equation — last Monday, the US stock market hit a 15-month high! This market has gone a long way and this will always breed short-sellers, profit-takers and cautious investors who take their money off the table.

This could result in a correction — a market fall of 10 per cent — or it may be a five to eight per cent fall that could be a buying opportunity for the cagey investor. The question is how long do you wait? I don’t know the answer to that question but I suspect we might dodge a 10 per cent sell off.

Above expectations

You see, there are still good reasons to be optimistic but the company earnings results are very important alongside economic growth and unemployment.

Thompson Reuters says 78 per cent of the S&P 500 index or 92 companies that have reported so far beat estimates by 21 per cent on average. And only 17 per cent were below estimates.

So, earnings are generally good and these will be critical to share price direction.

Specifically, companies that are important bellwether indicators for the US economy — General Electric and McDonald's — beat expectations last week and so did American Express.

This week there will be some important economic data such as existing-home sales, consumer confidence and GDP.

Correction on the way?

This is a vulnerable time for the market. Famous US hedge fund manager and short-seller Jim Chanos spoke on the so-called China bubble, and people like him will be trying to influence the market as they talk from their own book.

As you can see, a correction could happen if Bernanke was sacked, if the GDP number disappoints, or if consumer confidence plunges. But, on the other hand, the reverse could apply.

Importantly, companies are reporting better than expected. That should put a floor under the share price slumps and give reason for long-term investors, as well as smarties, to buy the dips.

And that’s why I think the correction talk could be incorrect, for now!

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, January 25, 2010