Local finance experts weigh in on stock market's recent 'back and forth'

PITTSFIELD What goes up must come down — that's the basis for Isaac Newton's universal law of gravity.

But what happens to objects after they land? Sometimes they bump up and down a few times before things straighten out.

"It's sort of like physics, when you drop something off the top of a skyscraper, it hits with velocity, then bounces," said Bill Schmick, who works for Berkshire Money Management in Dalton. "It's like a rubber band stretching as far as it can. It has to bounce back. Now, we have a period of back and forth."

That's Schmick's take on the ups and downs that have occurred in the stock market during the last few days.

After a long period of unprecedented growth, the Dow Jones industrial average began to topple on Friday, then plunged a record 1,175 points on Monday, a 4.6 percent drop, its worst loss in six and a half years.

It appeared the pattern would continue Tuesday morning when the Dow initially plunged 567 points to fall into correction territory, a term that describes downward movement of a stock or bond of at least 10 percent, for the first time in two years. But then the market began to rebound — the Dow surged almost 400 points in half an hour, had risen by 30 points by the middle of the day, and was up over 600 points near the end of trading. The result? Another huge swing in the Dow — an almost 1,100 point shift in one day.

So what should we expect from the markets over the next 24 hours?

"I think we're going to find a new base level within the next few days," said William Kirby, an investment adviser with Kirby Investment Strategies of Pittsfield. "We have not had a correction in some time. Frequently, the markets see a 3 to 5 percent adjustment each calendar year. We had not seen a 5 percent adjustment over the last two years.

"I think in large part we haven't bottomed out." he said. "We're seeking the bottom."

The recent downturn is more of a "panic attack" than the sign of a "bear market," Kirby said. Bear markets occur when the falling prices of securities causes a downward trend in the market to be self-sustaining, which creates pessimism that investors interpret as losses. Under those conditions, selling begins to increase.

"The fundamentals remain very, very strong," Kirby said, referring to the markets in general.

In the long run, the current conditions represent better opportunities, "especially for those fully invested," Kirby said. "I think the bottom line is, expect more volatility," he said. "Investors should keep in mind the fundamentals of the economy."

Thinking long term is key for those worried about how the recent roller coaster ride will affect 401(k) plans.

"It's tax deferred money; it doesn't hurt you," Schmick said. "This kind of pullback is exactly what you want because if the markets continued to go up and up and up then this pullback could have been two or three times as bad. All we're getting is a pullback that is long overdue."

The recent downturn has erased the 8 percent increase that investors have seen in their 401(k) plans since the beginning of January, Kirby said. But the good news is that we're only two months into the new year.

"We just got off to too good a start in January," Kirby said. "We've given it back. If the average investor with a 401(k) looks at it in this context, he hasn't gone anywhere this year. But it's only (February). It's not time to panic."

A downturn like this one can actually represent an investment opportunity.

"It doesn't hurt to have some cash on the sidelines, I refer to it as dry powder," Kirby said. "Utilize dry powder to take advantage of a market opportunity.

"If you're not fully invested, and you're looking for a chance to get into the market, the downdraft has created that opportunity," he said. "You're buying stocks at lower price levels 4 to 10 percent (less) in many instances."

Luke Delorme, the director of financial planning at American Investment Services in Great Barrington, said investors should take the recent downturn in stride.

"It depends on the kind of investors, but I think a two-day downturn which we've seen over the last two days is nothing unusual," said Delorme before the markets closed on Tuesday. "I think what's unusual is how consistent and calm the markets have been. Stocks contain risk. This is just a manifestation of risk. It shows up from time to time."

Don't follow the markets too closely right now, suggests Schmick.

"As an investor, the first thing I would tell you is turn off your TV, stop looking at your portfolio and go out and play golf," he said. "The problem is when you look at a portfolio you see the losses and the tendency is to to sell. If you don't look, you may still worry, but you don't sell at the bottom."

"Do your best to ignore the day-to-day fluctuations, really," Delorme said. "There is a lot of evidence that people who do well over the long term pay less attention than more attention. There's actually a study that found the 401(k) investors who did the best fooled around with it the least. You set up something you can tolerate and you have to look past the rest."

For those unwilling to take the risks that come with investing, Schmick suggests they do something else with their money.

"If you don't want to take the two or three yearly pullbacks," he said, "then you should not be in the stock market."

Business Editor Tony Dobrowolski can be reached at tdobrowolski@berkshireeagle.com or at 413 496-6224.


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