Stock Market: Correction or calamity?

Just five months after the decline created by the Chinese Stock Market’s plunge, markets worldwide –especially those in Asia—were under pressure again. This time the problem originated in the U.S., where the Standard & Poor’s 500 Stock Index had its worst week in five years, declining 311 points on July 26. Pundits may have varied opinions on the future, but they’re fairly unanimous in agreeing on the cause for the July slump—a swift change in the availability of easy credit, accompanied by concerns about how corporations and consumers will borrow money in the near future. Despite the fact that market gyrations meant that daily trading numbers closed with relatively moderate losses, investors remained very jittery.

Regardless of whether investment experts regard this as a market correction –a buying opportunity—or as a cause for alarm, the reality is that the demise of easy credit has killed the buyout blitz (which in turn, had been buoying stock prices). Not surprisingly, the stock prices of buyout firms and of corporations wooing takeover candidates took an immediate hit, but the tightening of the credit market affects companies in every sector. In the U.S., declines in new home sales and reported losses from major home builders, including Pulte Homes and Beazer Homes, provided yet more somber July news for investors. The credit crisis, that began in the U.S. with concerns about losses on securities involved in financing the sub-prime mortgage market that serves borrowers with substandard credit scores, has spread to encompass other highly leveraged companies and to private equity firms and large financial institutions.

Some market experts worry that a global credit crack-down may lead to sharp market declines and the return of a bear market. . Others see recent events as a needed re-adjustment. Here’s a summary of comments on the current situation from some leading investment experts:

Hold Tight
Many financial advisors are telling their clients to sit tight and reminding them that some degree of pull-back is a normal and a necessary part of the investment process. They point out that we’ve seen declines in the past that went on to rebound to push stocks into record-breaking territory. We saw this happen in February after the sell-off precipitated by the Chinese markets.

Evaluate Your Exposure to Risk
For those approaching retirement, it might be wise to sit down with your financial advisor to evaluate your exposure to risk and determine if adjustments should be made. That said, market experts note that panic selling won’t alleviate the problem or help to shore up your portfolio.

Consider the Other Side of the Coin
Losses –like those of late July— mean that stocks became cheaper. Some experts suggest that the market correction has presented us with a “buying opportunity”. If you believe that the bond market, financial institutions and buyout firms have been hit more than circumstances might really merit by problems in the sub-prime sector, then perhaps there are opportunities… for those willing to accept the risk. This bullish viewpoint is predicated on a belief that the economy is fundamentally sound, and that the market has the resilience to adapt to the current uncertainty.

And that gives us plenty to mull over during the dog days of August.

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