Emerging Investments Weekly Update

Panic in The Street

Just a few short days ago traders were popping the champagne corks following the Dow Industrials’ ascent above the 14000 mark. Now those same traders are crying in their beers. Mounting fears that the problems in the mortgage and corporate credit markets and ongoing woes in the housing sector have lead to a good deal of pressure on stocks in recent sessions.

All segments and sectors of the market were hit, with no group being used as a safe haven. For instance, utility shares, often seen as “widow and orphan” stocks for their steady revenue streams from regulated business and their attractive dividends, were among the worst performers, dropping 3 percent as a group.

Big declines can certainly be unnerving. And experiencing two such days in short succession will make most people sweat. Big back-to-back declines like these typically indicate that investors are operating in panic mode, selling anything just to get out.

However, this type of selling typically marks the end of correction, not the beginning of one. We won’t rule out a bit more selling in the short run. But this does not look the start of a major market meltdown.

Keep in mind that domestic stocks are relatively cheap as a group, trading at less than 15 times year-ahead expected earnings. Buyers are likely to step in and add positions at these attractive valuations.

While there are some concerns about the strength of the U.S. economy, the global economy continues to push ahead at a rapid rate. While China gets the lion’s share of attention, most emerging economies are expanding at very healthy rates. Japan and Europe are also growing nicely. This unprecedented global expansion will help to drive profits among large cap U.S. companies.

That’s not to say we’ll necessarily see a complete recovery in the next few weeks. Most likely stocks will remain mired in a trading range for the next several months.

In a worst-case scenario (albeit an unlikely one), if further weakness in financial markets started to spill over into the economy, the Ben Bernanke and Company would quickly cut short-term interest rates. That would cause stocks to rally in anticipation of stronger growth to come. But again, we just don’t see this happening anytime soon.