Recently I am repeatedly asked, “how much worse can things get from here?”
Firstly, no, the string of bad data does not surprise me. It has been a long time building. This downturn is long overdue. Anyone who is taken off guard by market losses to date was quite simply not paying attention over the past couple of years. Those that call themselves financial advisors and have left their clients' capital fully invested in this mess should be ashamed and fired.
As I have repeatedly said over the past year and a half, this is a very serious global slowdown. The worst that we have seen in decades. Where equity markets will ultimately bottom is impossible to predict for sure, but presently probabilities suggest that asset values may fall significantly further over the coming weeks and months. As we saw again today, Canada is now one of the more vulnerable markets to the next phase of this market decline. Having so far corrected only a scant 12% from the peak, the TSX could easily fall a further 20%. Possibly more. And the financials that have led this nasty slide down? Sorry, no signs of a bottom just yet.
Tonight the US Dow 30 Index closed below 11,000 for the first time in a couple of years. The next key level we are watching is for the Dow to have a daily close through 10,770. If it does close through that level in the weeks ahead, (and I think it likely will) then we must be prepared that over the coming months, the overall markets could potentially test their lows from the last market downturn in 2002.
Given our long-standing assessment that we are in the midst of a secular bear in stocks that began with the last downturn 2000-2002, we must be aware that a re-test of the '02 lows is within the realm of possibilities from here. A re-test of the 2002 lows would take the indices to the 7286 range for the Dow, 780 on the S&P 500 and 5700 on the TSX. Such declines would be a crushing blow to buy and hold investors. I truly hope markets do not go there. But the fact is prior cyclical lows have been repeatedly tested in past secular bear markets. That is just the nature of secular bears.
Investors must have a plan to protect themselves and have cash liquid for the next major cyclical buying opportunity that undoubtedly lies ahead.
These are tough times. But they are only horrible times if we are unprepared and left to suffer major capital losses in this downturn. For those that are defensive now and prepared for later, opportunities will abound once again.
For an update on the evolving credit crisis this past week watch this Bloomberg interview this morning with Nouriel Roubini: “Worst Financial Crisis Since the Great Depression and Worst U.S. Recession in Decades.”
Remember that in times of great adversity, those that survive with the least damage will win and live to thrive another day.
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