Market Action Feels Like 2001

Midway through the 8th day trading day of October, we have our 7th down day of the quarter. This market feels a lot like the painful one we experienced in late 2001. The culmination of the Nasdaq bubble bursting, the outbreak of SARS, and the 9/11 terrorist attacks led to an environment that felt as though it would go down every day and never end.

Today we have a similar scenario. Stock prices are indicating that 1) gasoline prices will remain at $3 per gallon even as refineries come back online in the coming weeks and months, 2) natural gas prices will remain high even after the winter season passes, 3) consumer spending will be poor during the holiday season and every season thereafter, and 4) the Fed will continue to raise interest rates forever. Add to it that we are in the historically poor performing month of October, and it feels like no end is in sight.

Like in 2001, today I wish I was a trader in these environments, not a long-term investor. As a trader you can just go with the trend and short this market. As a long-term value investor you need to buy stocks as they fall, knowing full well they will most likely fall further before they rebound.

However, I know that as a short-term trader I would not have been able to profit handsomely from some very contrarian bets. Shares of Royal Caribbean (RCL) fell from $30 to $8 in 2001 after leisure travel was halted in the United States. Four years later the stock closed 2004 at $54 per share, for a gain of 575 percent.

In the end, sacrificing the short-term for the good of the long-term can yield outstanding rewards. The key is stick to your convictions when it hurts the most. “No pain, no gain” rings true in the stock market as well.

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2 Thoughts on “Market Action Feels Like 2001

  1. David Hopkins on October 12, 2005 at 1:05 PM said:

    Chad –

    Any guess as to why my two ETF bond trackers (TIP & LQD) have also tanked recently? I thought bonds reacted inversely to stocks! I thought that the TIP would have especially held up well since it is adjusted upwardly for inflation and inflation seems to be on investor’s minds lately. Very puzzling indeed.

    You are correct on sticking to your convictions. It can be extremely difficult to watch the value of your holdings go down day after day, but if you have down your homework and truly believe in an investment, then panic selling is usually not the right move.

  2. Chad Brand on October 12, 2005 at 1:20 PM said:

    David,

    Indeed, in addition to stocks being down this year, treasury bonds are also down, which is hurting balanced portfolios badly.

    Usually bonds don’t track stocks, but in the case we have now, bonds have been mispriced throughout the year. The 10-year was yielding 4% when Fed Funds were on their way to 4.25%. For some reason, even though they have been telling us they would for months now, a lot of people thought the Fed would have stopped raising rates by now.

    I would not be surprised to see Fed Funds at 4.5% when Greenspan retires in late January. At that point, the 10-year will be knokcing on the door of 5%, which signals even more of a selloff in bonds yet to come.

    The TIPS will see higher yields due to rising inflation, but those are only reset every 6 months, and holding to maturity is the only way to ensure no capital loss on bonds. The day-to-day fluctuations in times like these can hurt, and mask the fact that inflation-protected bonds now sport a 4.8% yield, and that number could be heading higher.

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