By the end of 2008 the DOW was down around 4500 points (about 34%) – the worst year since 1931. The S&P 500 was down about 39% - the worst year since 1937. The NASDAQ was down about 41% - which was worse than the year 2000 tech bubble. US Stocks overall were down in the range of 8 to 9 Trillion Dollars.
Because of this, long held beliefs about stocks are now questioned:
1- The Buy and Hold strategy, which was a “no-brainer” - now doesn’t seem so.
2- Stocks are now Down over 10 years – historically they were always up.
3- Other investments have higher returns than stocks – Stocks were always the way to beat inflation.
The “average Joe” investors and the professional investors are now shying away from risky investments. They are moving money out of stocks and into short term, less risky investments - or Cash. This is helping to keep stock prices down.
Large companies and agencies that dealt in credit went bankrupt (Like Lehman Bros), were bailed out (like AIG, Fannie Mae, & Freddie Mac), or (like Bear Stearns, Merrill Lynch) were bought out by more stable companies. Government bailouts may not be enough depending on how long the economy stays weak. More bankruptcies are sure to come.
Banks, companies and individuals are borrowing less because loans are not available to them. This will hold down the credit markets, company growth, and the housing market.
In 2009 housing costs will fall enough to create demand, and along with the lower cost loans provided by banks, will help the housing market and the credit market.
The ever-increasing cash reserves held by companies and individuals are pent up future investment money. With stocks at historic lows, this money will find its way into the market and help to push stocks higher.
Government tax cuts, government spending and the Central Bank together are creating a very large economic stimulus. This is the grease that will allow the economic engine to turn with greater ease.
There are opportunities across the board to build wealth now. Whether you are interested in stocks, real estate, the credit market or bonds – research and follow your favorite investment vehicle. Create a decisive plan, which will allow you to invest before the massive up side is gone.