Just a few months ago, this morning's news would have sent stocks soaring. Sales of existing homes rose 5.5% in September, the biggest monthly gain in five years, reaching an annul rate of 5.18 million. The inventory of unsold homes fell in September, the first decline in more than a year. The evidence of a change for the better in housing is growing. Gasoline prices are back at or below $3 a gallon. That is good news for consumers. But in today's dismal market, good news is being ignored. On Friday, Japan's stock market fell 9.6%, Hong Kong was down 8.3% and South Korean stocks fell 10.6%. European stocks followed the trend, falling up to 6%. And our stock market was down sharply at the opening this morning. It can be hard to tell which part of the world is leading and which part is following the decline in stock prices. Yesterday, the U.S. Dow Jones Industrial Average finished up 172 points. But other U.S. indices were flat or down. And it was a roller coaster ride all day. Did U.S. uncertainty yesterday trigger the drop in Asia that in turn triggered a drop in the United States? Having been through several global stock sell-offs, my opinion is that the world looks to the United States for market leadership. My conclusion is confirmed by the strong dollar, up 20% from its low to the euro just three months ago. Capital flowing into the dollar shows that foreign investors see the United States as a safe haven.
Unfortunately, when it comes to the stock market, American investors are in a full-blown panic. Morningstar's Market Intelligence data says that a record net $49 billion went out of U.S. mutual funds in September and that early October data shows that the situation is even worse this month. When fund holders ask for their cash, the fund manager has no choice but to sell some assets (usually stocks) to raise cash to meet the redemptions. The selling drives prices lower, terrifying more fund holders, who then want their cash. This is a vicious cycle that is terrifying investors all around the world. It also is a lose/lose situation. Long-term investors who hold on to their fund shares see their net worth plummet. Those who sold have cash with a very low yield, and no hope for growth. They are also highly unlikely to go back into the market for a long time.
Morningstar studies mutual fund investor returns. They found that investors buy high and sell low to their disadvantage all the time. This history says that today's panicky selling is a contrary indicator. We should be buying when the crowd is panicked and selling. However this is hard to do, even for the most patient investors. No sooner do we buy a depressed stock than it becomes more depressed. There is no way of knowing in advance exactly when and where stocks will bottom out and start climbing. What we do know is that this is a financial crisis, not an economic crisis. There will be economic damage done by the financial crisis, but that kind of damage can be repaired fairly quickly. Stocks, as we have seen, can go back up as fast as they came down.
