The College Investor’s Market Thoughts – August 5, 2011

So, I’m going to try out a new recurring post, and I’d really like it if you gave me some feedback on this as I go forward. I’m going to include a stock market wrap-up each week with a few thoughts on my own sprinkled in. If you like it, let me know. If you think it’s a waste of blog space, I’d love to know that too. Even though investing is for the long term, there are always events that create new opportunities, and there are always changing conditions that you should pay attention to. Alright, let’s get started!

First off, what a week this has been in the stock market, economy, and country!

As you can see, the stock market is down as of Thursday by over 3%! For the year, that puts the market down over 9% from its highs. Anyway, that signals correction time, which in my opinion is way overdue.

There was also a lot of big news in the economy and country this week:

1. The Debt Ceiling – Solved until Novemeber, but didn’t really solve anything. The government just continued to kick the can down the road. I wish Congress would act more like a Board of Directors of a company (i.e. the United States) and have a fiduciary responsibility to protect the best interested of our country. Just like any business, you need to both earn income and balance spending to match it. You can’t just do one or the other – which is exactly what our Congressmen did. Oh well, we will just get to see this all played out again in three more months!
2. ISM Manufacturing Index – To start the week, the ISM Manufacturing Index came in below expectations and barely over 50, which indicates expansion. This is a bad sign that the economy is slowing down, as companies are not placing orders. What is scarier is that this is prime time for retail orders to be placed for the Holiday shopping season.
3. Consumer Spending – On Tuesday, the government released the consumer spending report, which showed a decline in consumer spending by -0.2%. This does not paint a good picture of the economy, since our economy is primarily driven by consumer spending. Plus, the lag time between this report and when companies see it also reflects in orders placed for manufacturing
4. Employment – ADP announced on Wednesday that private payrolls rose by 114,000 in July, the lowest month of addition since the recovery began. It beat analysts’ estimates, but it is still very low. The actual government report comes out today, and it will most likely be just as bleak. Jobless claims did go down a bit in July, but still over the magical 400,000 level, which indicates a poor job market.

What To Do:

Sorry for all the doom and gloom, but the number don’t lie. Here are my thoughts on what to do going forward:

• Don’t panic and sell. It’s too late to get out of the market now. You should have sold in May and gone away. But since you didn’t, you would just be selling low. Hang in there. Especially if you have a balanced portfolio.
• Don’t buy gold. Just because the market is crashing, don’t rush in to buy gold as a hedge. It has already gone sky-high, and it will come back down. You’re doing the opposite of above – you’re buying into it high.
• Avoid bonds too. Most people move into bonds as a safe haven exit strategy. At this point, you’ve missed the boat as well. When the stock market tanks, bond prices go up, so you’re going to be buying into a high there as well.
• Hang on and look for deals. This is the best option. Assume your portfolio is losing 10% of its value. It’s the stock market after all, and you shouldn’t put anything into it that you need right away. It is going to be a rough few months, but we are getting back at a point of reasonable valuations for companies again. I’m betting that there are going to be some great buys soon. Remember the adage, “Be fearful when others are greedy and be greedy when others are fearful”. Thanks Warren for the solid advice. I’m heeding it right now!

This post was written by...

Robert – who has written 317 posts on The College Investor.

Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.

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