Wes Moss: Why market slump shouldn’t scare you

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.

(This is a follow-up to an article I wrote in April of 2010, when the Dow was below 11,000.)

Wes-Moss-032011-USE-THIS-VERSIONIt’s not your imagination; the stock market really has been down for six weeks in a row. That’s a pretty rare event; it’s happened only 16 times since the Great Depression. If the slide continues and we get seven straight down weeks, it would be only the fourth such slump since 1928.

So from a historical perspective, the market is getting very “oversold” — meaning at some point this much selling pressure typically gives way to buyers stepping in and helping to halt the slide.

What’s the reason for the recent down streak? The current economic soft patch — falling home prices, sluggish manufacturing growth and a disappointing jobs picture — has Wall Street worried we’re staring down the barrel of another 2007-09 economic meltdown.

If we are headed for a new recession, the market should be going down — and will continue to do so. But if the recent weakness in economic data is just temporary, then history tells us we should get some relief in the market very soon.

Why we shouldn’t expect the worst

Here are three reasons this economic slow patch is just that, and not the beginning of a new national nightmare:

1. Oil is still close to $100 a barrel, a big change from its nearly $115 trading level in early May. As a result, the price of gas has fallen nationally from about $4 per gallon to less than $3.80. I expect that number to go even lower as we head into summer.

(Last week I filled up for $2.59 a gallon. Regular gas was $3.59 at the pump but my Kroger fuel savers reward card saved me $1 per gallon. More on this next week.)

2. Japan’s earthquake has had a negative impact here as U.S. manufacturers have struggled to get Japanese-made parts. As Japan gets back online, we could see U.S. manufacturing numbers improve.

3. Yes, the May jobs report was disappointing. But the economy did create more than 80,000 private sector jobs last month. Unfortunately, those gains were offset by layoffs in manufacturing (the Japanese quake again) and local government, where budget shortfalls are rampant. Neither of these significant drags on the job market will continue forever.

These factors — lower gas prices, Japan’s recovery and continued improvement in the jobs picture – will restore confidence on both Main Street and Wall Street. And, as confidence returns, the economy and stock market will get back on track in the second half of this year.

And if economic “repair” does play out in that timeframe, the market’s recent sell-off should be viewed as “stocks on sale” — not Armageddon.

What’s your thinking: Are you buying, waiting for the market to go lower or running for the hills?

– By Wes Moss, for Atlanta Bargain Hunter

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2 comments Add your comment

Craig

June 13th, 2011
8:00 am

Its the 1st wave down of the 3rd wave! Dont get too comfortable the crash is coming. It will more than likely happen in 2012. The market will go back up twice before then but with the debt + spending+ the instability of the dollar and China shunning our currency…We are screwed!

DW

June 13th, 2011
12:15 pm

I think Wes is calling this one right. Id wait for a small bounce and then sell stocks until the technical and fundamental picture turns around.. probably later this year sometime. Well see