The markets have gained 3000 points back in just under 6 months, it’s still not too late to jump on the bull and ride it by it’s horn. The key is, knowing what to buy now that we’ve seen the rebound start. To do that though, you need to first understand what fueled the demise and its rebound, which we’ll discuss below.
By now, most people understand that a massive housing bubble – among other things (like rapid consumer spending without regards to saving and with no means to repay debt) caused this crisis. More specifically, stocks tied to sub-prime mortgages were bundled up as good investments. People thought their home values would continue to rise, and they took out home equity loans and went spend crazy. Companies were profitable across the board with unreasonable expectations that we would be able to continue that pace. When the markets realized people were defaulting on their homes with loans tied to variable interest rates, the real estate market fell with a thunderous crash. Suddenly, with home prices down – all of that additional or extra money people had (because of their home equity lines of credit) – was suddenly frozen – and people began to panic. They decided to hoard their money and tried to make-up for the over spending – but not spending. That sent companies sales across the board down the tube – and most all stock prices were affected because now reasonable future expectations set in. When the big banks realized they weren’t sufficiently capitalized to take losses on the numerous inflated homes they had to take back over as a result of foreclosure – they started to scrutinize who they were lending to, and suddenly there was much less individuals who could qualify for homes, so prices had to drop further.
Finally, we think we’ve seen a bottom in home prices, and the markets have started to stabilize. People have started spending again and also snapping up stocks that are priced at historical lows. But what is driving the rebound? The bottom line is future expectations, just a couple of years ago – there was too much uncertainty as to the extent of this problem. As earnings reports start coming back showing continual growth – stock prices soon follow.
In developing a top investment strategy, look for companies that are showing consistent growth in earnings – and use a little common sense – will they be able to keep it up in the future and over the life of your investment horizon. If so – then proceed with caution, but don’t wait too long – you could miss out on still basement bargain prices.