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Thread: weekend commentary - Adverse Feedback Loop

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    Banned Melonie's Avatar
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    Default weekend commentary - Adverse Feedback Loop

    (snip)"Six -- count 'em, six -- major financial firms now declare that the United States is in recession. That list includes heavyweights such as Goldman Sachs, Merrill Lynch, and Morgan Stanley.

    Several other financial institutions, while not yet using the "r" word, are nonetheless pessimistic. The Wall Street Journal quoted a Wachovia report that said, "There is no question that the economic news has taken an unusual and disturbing turn for the worse."

    Of course, the stock market has done nothing to contradict this outlook. The S&P 500 is already down nearly 8% year to date.

    If the worst is yet to come, you'd be daft not to sell ... right?

    "An adverse feedback loop"
    After all, every part of our economy seems to be spiraling downward together. Federal Reserve official Janet Yellen called this "an adverse feedback loop -- that is, the slowing economy weakens financial markets, which induces greater caution by lenders, households, and firms, and which feeds back to even more weakness in economic activity and more caution."

    Students of American history will remember that a similar feedback loop prolonged the Great Depression -- and it took a world war to break the cycle.

    So if the stock market does tank this year, we're all going to look back and say we saw it coming. Why not sell and wait for safer times?

    Not so fast
    My Foolish colleague Paul Elliott called this way of thinking "the real threat facing investors today." But he advises you to stick it out -- as do I. Two key points apply:

    Recessions do not last long. Since 1945, none of the 11 recessions on record lasted more than 16 months -- and none longer than eight months since 1982.
    Stocks do not all go down during recession. In reality, you can make a lot of money by investing when economic confidence is weak.
    Take our last recession (March 2001 to November 2001), for example. During that time period, the market had nearly the same number of gainers as decliners (2,000 or so on each side). While bellwethers such as ExxonMobil (NYSE: XOM), General Electric (NYSE: GE), and Cisco Systems (Nasdaq: CSCO) were down (8%, 16%, and 17%, respectively), Intel (Nasdaq: INTC), Genentech (NYSE: DNA), and UnitedHealth (NYSE: UNH) were all up (12%, 10%, and 21%, respectively).

    The killer stat, though, is this: Since the 2001 recession began, 826 stocks have tripled. Eight months of contraction simply cannot stop innovative operators with wide market opportunities such as Apple and Amazon.com (Nasdaq: AMZN).

    An aside to all of this optimism
    It should be noted that stocks dropped substantially in 2000 leading up to the recession -- just as they've dropped of late. Those examples, however, just go to show how the stock market does not move in lockstep with economic realties. Instead, it's an imperfect prediction machine with millions of analysts, institutions, and individuals trying to incorporate the information they know into daily trading decisions. "(snip)

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    God/dess Deogol's Avatar
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    Default Re: weekend commentary - Adverse Feedback Loop

    In short:

    Buy low.
    Sell high.

    (Just don't buy the ones that are gonna go bankrupt.)

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