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With the Dow Jones Industrial Average, Standard & Poor's 500 Index and Nasdaq Composite Index all closing below key levels, I'm getting a lot of questions from investors. And the most-frequent query is this: "How low can it go?"
If you're a serious investor, you'll want to know where the markets are headed and what the maximum downside could possibly be. I've got some good answers for you. Let me show you some key numbers.
The Magic Levels
In a talk I gave last November, I warned that 1,329.26 on the S&P 500 was essentially a "trigger point" at which we'd start to hear recessionary talk from the U.S. Federal Reserve. And I stunned my audience when I told listeners we'd be down to that level by the middle of January.
We didn't quite get there, but we didn't miss by much. On Jan. 17, the S&P 500 closed at 1333.38. To the day, a Fed Governor broke ranks and used the "R" word.
The next trigger point, I said, would be when the S&P dropped past 1,303.91 - no later than mid-March [Please see related chart].
The bottom line: The S&P 500 closed Friday at 1,293.37, which means we can expect a whole new round of hand wringing from the "Inside the Beltway" crowd. Unfortunately, what we really need is for them to launch a carefully considered, decisive response to the problems at hand.
As for me, I'm now watching for the key Standard & Poor's stock index to hit 1,291.02. If we drop below that level in the next few days - and if there's no decisive countermove from central bank Chairman Ben S. Bernanke - my proprietary analytics suggest the S&P may retreat all the way down to 1,117.43.
Here's something else to consider. As of yesterday's close, the S&P is already down 17.9% from its peak at 1,576.09. But an additional drop of 11.2% drop from that peak that takes the S&P down to 1,117.43 would be detrimental on a variety of levels:
- First, that would put stocks well into official "bear market" territory. Now I'm not much for labels, myself, but I do know that this would have a major negative effect on investor sentiment - the stock market's equivalent of opening Pandora's Box.
- Second, investors would endure a multi-trillion-dollar haircut on top of the crew cut they've already received.
- And third, a downdraft of this magnitude could eviscerate retirement plans, much of that wealth never to be recovered.
Fortunately, there's an easy and painless way to escape this pain.
The Bear Market Great Escape
Let me review some important steps for you to consider:
- Safety and Balance Wins the Race: Make sure you've got the bulk of your assets in the "safety and balance" category of investments. This category includes balanced mutual funds and bonds. Tried-and-true choices include such gold standards as the Vanguard Wellington (VWELX) and the PIMICO Strategic Global Government Fund (RCS).
- Global Income Rules: We've said time and again that, in volatile markets such as the ones we're dealing with now, dividends and income are crucial. But income that emanates from strong global trends is even better. Just because the U.S. economy appears to be falling apart doesn't mean the rest of the world will, as well. The economic "decoupling" we've spoken so often about is real and there's an increasing body of data to support our contention. The pundits who have been dismissive of this global economic paradigm shift will rue the day that they voiced their doubts. Well-managed and globally diverse companies will lead the way while helping you build up some thick financial armor. (We track a good number of these in The Money Map Report.)
- Fly Inverted: Pick up a few shares of so-called "inverse funds." That way you can concentrate on preserving your upside without dismantling your portfolio. History shows that keeping your powder [capital] dry is not an all-or-nothing process. You never want to put yourself in the position of having all of your investment returns totally dependent upon correctly timing the market. As the old market adage says, that's like trying to catch a falling knife. Instead, we want to structure our investment choices so that we can "go with the flow." If you're a sailor, you know that it's a lot easier to get the tides right than it is to predict the waves.
I'm certainly not suggesting that a 1929 "Great Crash" is right around the corner. But there's little question that the markets will stumble around for some time. The credit crisis that started with the subprime-mortgage meltdown is nowhere near finished. My own metrics show that this could become a trillion dollar problem. If that happens, it is going to take time for the markets to work their way through it.
But no matter how low the markets go, Money Morning will be here to help and keep you informed of the latest market news. [Editor's Note: To read Keith Fitz-Gerald's Money Morning research report, "Five Survival Strategies That Will Allow You to Profit Even in a Recession" please click here. The report is free of charge.]
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.