Bearing Down

As the investor roller coaster ride continues, some are wondering if they can just get off the dizzying ride. For those who can’t deal with the pain any more, no amount of data that is trotted out about going to cash will change their minds. With that said, there are a bunch of investors who are hunkering down and making peace with the bear market.

Let’s start with yesterday’s dismal performance. Now that investors are not consumed with the melt-down of the entire financial system, they are turning their attention to the economy. Given the past year, you can’t blame people for fearing the worst—and the worst would be a lengthy and deep recession accompanied by massive job losses (unemployment rate is projected to reach at least 7.5-8%). As a result, the Dow Jones Industrial Average posted its seventh-biggest point drop in history, plummeting 514.45 points, or 5.7%, to close at 8519.2, a level not seen in nearly five years. The Dow re-tested previous lows, but rallied before the bell. Still, the index has given back 746 points over the last two sessions. The day followed steep losses overseas, as many emerging markets tumbled 10%.

The recession fears spilled into commodities markets, led on the downside by crude oil. The reasoning is simple: if economic growth is going to slow, then the demand for raw commodities will fall. Crude dropped $5.43, or 7.5% a barrel to $66.75, its lowest point since June 2007 and drop of 54% since July 3. Gold futures declined sharply on the back of a strengthening dollar. Gold dropped below important technical chart levels, which accelerated selling pressure. December gold fell $32.80, or 4.2%, to settle at $735.20 an ounce. Other metals that are more sensitive to economic cycles—copper fell to its lowest level since 2005.

So where does that leave those who are still on the investment roller coaster? Well a bit nauseous, but still breathing. This tireless bunch is able to look to the future and recognize that when the government puts massive dollars into the system, it will eventually help out. The two trillion plus dollars (the bailout plus AIG, Bear Stearns and the commercial paper facility) as well as rate cuts should resuscitate the system -- eventually. Once banks are revived from their lending comas, they will actually lend again. Long term investors know that stimulus takes six to 18 months to have its effect on the economy. Additionally, there is a bunch of cash (estimates run over $10 trillion) sitting on the sidelines as investors take comfort in money market funds and T-bills. This money needs to grow and in a zero interest rate environment the money is likely to find itself back into the stock market.

None of this will happen immediately, but as we become more accustomed to the daily gyrations and the Dow Jones Industrial Average firmly ensconced below that 10,000 level, long term investors are bearing down and hunkering down for a long haul. They are likely to be rewarded for their patience.