Seems like we're just stumbling along in this down year (so far) for most stock market investors. That could change at any moment -- but let's assume for now things won't change much today at least.
Where will things go from here in the markets? Four scenarios pop into my head:
SCENARIO #1 -- We Muddle Along. This is where the Bear market continues well into 2009 and even into 2010. We see the usual Bear rallies and sell-offs, and we can even get lucky with a stock holding here or there popping in price via takeover or something else. But basically we just endure the next couple of years (give or take a few months), then we start a new Bull phase.
SCENARIO #2 -- We Muddle Along...and Along...and Along. This is where the Bear market goes on much longer than anyone anticipates. Just grinding on and on, well beyond 2010. The Bear keeps going and investors, even many considering themselves "long term" investors lose patience and throw in the towel on holding equities, which helps fuel the Bear even more. The general media runs stories on the death of stock investing, with profiles of families facing ruin because their stocks and stock funds have been down seemingly forever. The heads of the New York Stock Exchange and NASDAQ are hauled in for Congressional hearings, with members of the Senate and House demanding to know what they will do to correct the great wrong being done to the American people. "Big Markets" replace "Big Oil" as the villains politicians cite in seeking votes.
SCENARIO #3 -- Surprise on the Upside. This is the best of the scenarios -- the new Bull phase takes place much sooner than anyone anticipates. It could be sometime this fall or early next year or, heck, tomorrow for that matter. I doubt this happens, but the more you hear people taking for granted that the market is and will be down for awhile, the more we could see "conventional wisdom" get stood on its head. Not for the first time in history.
SCENARIO #4 -- Surprise on the Downside. This is the most scary. This is where we're all complacent muddling along in what we think is Scenario #1. But out of nowhere we suffer a market crash, or perhaps an extended and very brutal market sell-off of massive proportions. It could be sparked by some geopolitical event, or series of events. Or it could be the housing slump turns out much worse than we've seen, followed by rot in other areas ranging from auto loans and credit cards to who knows what. Or something totally unforeseen.
Personally, I believe the first scenario is most likely. But just because the odds are in something's favor doesn't mean it happens. I remember the New York Jets beating my beloved Baltimore Colts in Super Bowl III, after all. The third scenario would be great, because I like seeing my portfolio increase in value (well, duh!) and the sooner the better.
The other two scenarios? Well, I don't do the top-down stuff. But the really bad Bear markets in our history took place when most American households didn't invest in the markets. Now people have been conditioned to buy through the ups and downs, and I do that myself. Yet what if we saw a very long trashing of the markets -- more than just a couple of years? Would the broader public panic? I don't think so, but I don't really know. No one does.
For now, the muddling continues.
Thank you for blogging. From your scenarios, it seems the prudent thing to do is to take some money out and park them on the sideline. Something to be said here is on the assumption by the Fed that inflation will subside with slower growth. If inflation continues at this rate or even go higher, we might be going somewhere else.
Posted by: SimonS | August 25, 2008 at 09:45 PM
Simon: Thanks for reading. But I'm not urging anyone to take money out, because I'm not doing that. I'm simply listing for possible scenarios, nothing more, nothing less. I believe anyone in stocks using money they won't touch for at least five years will be fine, on average.
Posted by: John | August 26, 2008 at 10:59 PM