The Daily Dow
Thursday, August 28, 1997
by Robert Sheard
LEXINGTON, KY. (Aug. 28, 1997) -- Nothing gets under my motley collar quicker than the condescension of the Wise. Not a week goes by when at least one muckety-muck talking head comes on television and warns that the small retail investor doesn't know what he's doing and will send the market reeling if we get a correction (or worse).
Yet isn't it amazing that when an analysis is done of the more volatile down days for the market, it's not the retail investor tripping over himself trying to find an exit, but the institutional investor who can't stay in his seat? The typical retail investor is plowing money monthly into a retirement account and doesn't even follow the market all that closely. He's not surgically attached to a Quotrek machine, trying to decide when to jump out of the market.
The Dow is down nearly 7% from its recent closing high of 8259 -- a modest correction by most accounts. But what would happen if we got a full-blown correction, say even a 20% drop from the recent peak?
Not all that much, really. A 20% drop from that 8259 high would bring the Dow down to 6600. Where was the Dow at the start of the year? 6448. If we were to drop to 6600, that represents a market multiple of only 13.7 times the consensus 1998 earnings estimates for the Dow thirty. (First Call's estimate is for $480.94.)
So even a significant sell-off, a 20% drop that even the Wisest of bears would have to admit was a correction, would leave us slightly ahead for 1997. Considering how well 1995 and 1996 went, who among us long-term investors could really complain if it were even that big a drop?
There's nothing to say that any correction can't bring an even larger drop than 20%, but it doesn't seem likely given the market fundamentals today. Interest rates, while climbing a touch recently, are still much lower than they were in the crash year of 1987. The economy continues to grow somewhat steadily, and while the inflation hawks are ever vigilant, real signs of inflation have yet to be sighted.
So if the market's negative tone these days is making you nervous, that's okay. Just don't let those nerves push you into a Wise decision to try to time the market. If you're sitting on a pile of new cash, however, waiting to get into the market, a correction right now is your biggest ally. Ride the whole ride, Fools.
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T - 13/16 39.31 GM - 7/16 63.75 CHV - 15/16 79.06 MMM - 5/8 90.94
Day Month Year
FOOL-4 -1.25% 2.46% 8.52%
DJIA -1.19% -6.42% 19.33%
S&P 500 -1.10% -5.31% 21.99%
NASDAQ -0.89% -0.78% 22.48%
Rec'd # Security In At Now Change
1/2/97 153 Chevron 65.00 79.06 21.63%
1/2/97 179 Gen. Motor 55.75 63.75 14.35%
1/2/97 120 3M 83.00 90.94 9.56%
1/2/97 479 AT&T 41.75 39.31 -5.84%
Rec'd # Security In At Value Change
1/2/97 153 Chevron 9945.00 12096.56 $2151.56
1/2/97 179 Gen. Motor 9979.25 11411.25 $1432.00
1/2/97 120 3M 9960.00 10912.50 $952.50
1/2/97 479 AT&T 19998.25 18830.69 -$1167.56
CASH $1009.44
TOTAL $54260.44