Why Should a "Market Falling!" Concern a Long-term Investor?

By Chris Lau

Market volatility has and will continue to raise the blood pressure for investors. For the year, the Federal Reserve felt a greater bias in raising interest rates to slow the hot economy. Although there are economic figures that suggest that inflation is more of an imagination, the market is changing so rapidly that these figures are not as meaningful for the Federal Reserve as they used to be. It could be a result of globalization, the topic of which would easily require lengthy analysis.

Late last year I felt (and wrote) the market would continue to fall because of the pressure of rising interest rates and rising oil prices. At thirty dollars a barrel, everyone is beginning to feel the affects of high prices at the fuel tank. Most recently, the airlines in the United States, parcel delivery services, and protesting truck delivery services are reacting to higher fuel costs by adding surcharges or raising fares. It is not a pretty picture, and as more industries are affected at their "bottom line" (i.e. costs in running the business), everyone will be affected in some way.

Knowing When to Sell a Stock

It is time investors recognize the bias investment houses have on stock recommendations. Brokerages generate business when their clients are buyers of stocks. Therefore, analysts benefit their firm if they issue vague recommendations from the "buy a bit of" to "buy like crazy". The rating titles used currently (from best to worse) are "STRONG BUY", "BUY", "ACCUMULATE", "NEUTRAL", "REDUCE", "SELL". The only real negative opinion is "sell". After all, what does it mean to "reduce" a stock if one does not even own any of it? Even worse is the "neutral" rating, because it provides little meaning in terms of providing a meaningful recommendation.

"I'm In It For the Long-Term, So a Falling Market Does not Affect me!"

It would be very reckless and irresponsible for any investor to disregard a stock correction (a short-term but sharp drop) or bear market (prolonged declining market). Falling markets create buying opportunities, but will also annihilate hotly-inflated stocks. Investors holding not-so solid companies will feel a bite from the size of their portfolio.

Market Traders, Listen Up! Investors should keep an eye on companies that are sensitive to a slowdown in the economy. In assuming that rising interest rates will put a squeeze on consumer spending habits, there will be difficult times ahead for companies such as Tommy Hilfilger, GAP Inc., or Walmart. We are currently in a world with two stock markets: the technology-heavy NASDAQ and the rest of the market. Should investors sell-off technology stocks, money will pour into "traditional" economies such as resource stocks. With that in mind, there may potentially be good times ahead for metal producers, including Barrick Gold, Inco Inc., Talisman Energy, and Alcan Aluminium. The reason is that the US may face risks of slowing down, but the global economy is strong. I anticipate Asia's recovery to be steady and sustainable, and Europe to do well despite a rising interest rate environment.