World Market Update

The world markets took a hit today (again) upon market confidence levels decreasing, even with the recent Bailot Bill passed, and the Federal Government injecting capital positions into the nations top banks. 

Dow:    -7.87%
Nasdaq:    -8.47%
S&P 500:   -9.03%
Russell 2000:   -9.47%

Yahoo! Finance headlines “Stocks plunge as new data points to a recession.”  I’ve had some people ask me recently what exactly the definition of a recession is.  Some people think that a significant drop in the stock market indicates a recession.  This is a common misconception.  Technically a recession is a period of two consecutive quarters of negative GDP growth.  The definition of a depression is a little more complicated.  I do not believe we are in a depression, and actually I do not think this downturn will last long enough to be determined a depression.  According to about.com, A depression is a severe economic downturn that lasts several years. Fortunately, the U.S. economy has not experienced a depression since The Great Depression of 1929, which lasted ten years. The GDP growth rates were of a magnitude not seen since:

1. 1930 -8.6%
2. 1931 -6.4%
3. 1932 -13%
4. 1933 -1.3%.

A depression really signifies more than simply negative GDP growth.  It takes more into consideration such as high unemployment, US economic output.

If you are an investor looking for short-term profits, good luck.  Investing for short-term at this point in our global economy is very difficult, and must be completed by expert stock picking.  Even the experts aren’t getting it right all the time, just ask the biggest hedge funds.  Check out this article, written by Charlie Gasparino of CNBC, which details losses incurred by Citadel Investments and Highland.  Average losses for hedge funds were 6.2% in September (their worst month ever) according to TrimTabs Investment Research.

This is not an attempt to scare investors away, but just a word of caution when picking stocks in the current market condition.  According to Jim Cramer, “buying blue chip stocks and holding them for long periods of time is a thing of the past. 

Remember, diversification is best…and not just diversification among stocks, but diversification among all asset classes.  Some good investment management reading is a unversity endowment annual report.  The large university endowments, which manage portfolios in the billions of dollars have been known to be of the best performers in the past few decades.

yale_endowment_07

More to come on the stock market and the overall economy…

MF