At the end of my post yesterday, I said "I am loving this market these days." Today, on my lunch break, I invested a little more (real money, not hypothetical). By 4 pm everybody else jumped on the bandwagon and the market recovered from another huge loss to close basically flat. I had hoped it would stay down, but oh well.
Now, I'm no expert, but what I see is continued strong profits, largely due to increased productivity, which I attribute to companies finally making good use of faster computers and decent software. The economy is chugging along, overseas markets are doing great, emerging markets still have tons of room to grow as more jobs land there, building new generations of workers with money to spend, etc, etc.
A certain number of our neighbors lied to themselves and their mortgage brokers about how much house they could afford. Many of them signed up for adjustable rate mortgages that they were told would go up in a few years. A few years passed, and their loans went up- probably on the low end of what they were told, given that interest rates are still very low,- and now they can't pay. To them I say, deal with it.
I'm sure there was some fraud, and I understand much of the concern around how mortgages are sold to Wall Street so fast that brokers have no incentive to confirm that buyers aren't lying. This is not cool and something should be done.
I'm also sure there are some who stretched just a little and bad things happened- layoffs, sickness, life, etc. and now they can't afford their homes. To them I say, I'm sorry. I hope they can turn their finances around and get back on their feet.
The question investors have to ask is- how much of an impact will all this have on global markets?
My guess is, not as much as the recent sell-off would suggest, and that is why I invested. Also, my sense is that valuations on stocks are reasonable, overall. Morningstar calculates that the markets are undervalued:
but you only have to look back to the early 2000's to see that things can get a whole lot worse...
But I think that the steep decline after 2000 was a reaction to ridiculous valuations and I do not believe that valuations are ridiculous or where earlier this year, so I see the recent quick sell-off as a good opportunity to invest. If only I had some extra cash!
Off course, I could be wrong.