2 June 2020
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It's time to remember one of Warren Buffett's most famous sayings: "Be fearful when others are greedy and greedy when others are fearful".

Dow down and now I earn my money!

Peter Switzer
2 September 2015

By Peter Switzer

This is when someone like me earns his money! The Dow has put in a shocker, down over 400 points at the start of the crucial, final hour before the closing bell rings on the New York Stock Exchange.

What’s behind this negativity? One word — fear!

There’s fear of softer data in China but that’s an overreaction. There’s fear of the Fed raising interest rates in a couple of weeks time and there’s fear from short-term players that they’ll miss out on a good chance to sell today and then buy later, when this sell off has run its course.

And of course, you have the nervous nellies, who are running for the exit doors because they think this could be the start of a crash and bear market.

This is why I say that it’s times like these that someone like me earns his money.

What I’m writing is risky because I know I could be wrong — picking markets, comprehending economic trends and then timing investing isn’t easy. It’s not a science but we try to make it as scientific as we can.

It’s not historical and Warren Buffett has cynically remarked that “If past history was all there was to the game, the richest people would be librarians.”

If we ignore Warren’s tautology of “past history”, as history is always past, the point is well made. But note he says, if “…history was all there was to the game”.

History plays a role and when it comes to the big swings in markets, in the absence of something weird like sub-prime mortgages and ratings agencies screwing up their ratings on these mortgages (as happened pre-GFC), then the economics plus history can be important to someone like me trying to work out how fearful I should be today.

History helped Morgans chief economist Michael Knox predict that, with the first interest rate rise in the US, the stock market will be down for a month but, wait for it, “up for a year!”

Like me, he could be wrong on this call, but I’m betting his knowledge (and my own) gives us a good chance of being right in saying this drop in the market is likely to be a buying opportunity.

And if Knoxy and I are right, as I expect, I’ll remind you in the not too distant future that as Buffett has said: “Be fearful when others are greedy and greedy when others are fearful.”

Fund managers will be looking at stocks today and tomorrow and they’ll be looking for bargains that will make them money before the year is up, so they can show off their great returns for the year.

I don’t blame them because that’s what they do.

Making today even more dramatic for stocks will be the release of our latest economic growth numbers and I have to say I’m a little apprehensive.

Economists think a number around 0.5% for the June quarter is on the cards, giving us a growth rate of about 2.2-2.4% but some economists think inventories could even create a much lower figure. I hope not as economic indicators are turning more positive and we don’t need negative headlines in media outlets based on numbers that track the economy from April to June.

After all, it’s now September and we’ve had three months of post-Budget small business spending, a 10 US cents lower Oz dollar, rising consumer and business confidence and a stellar housing construction boom.

The economy of September looks better than the one we saw before the Budget in May, but today’s old figures could paint a picture that’s worse than it really is now.

The Dow was down almost 470 points at the close so we will cop it today on our market.

News outlets blame the weak Chinese manufacturing data but that’s only part of the story. The oil price was off 7% after a 27% rise in about three days, so that didn’t help. But smarter analysts know that the 3.7% economic growth number for the US on Friday says the Fed could only delay the first rate rise if they were worried about a big fall in stocks!

I think the Fed is going to have to bite the bullet some time and bullet-biting time looks awfully close. That’s why the Dow is dropping.

Why do I think the US economy is more important for today’s fall rather than the China story? Well, David Kelly, chief global strategist at J.P. Morgan Funds summed it up on CNBC this way: “China has its problems but it's not a big driver for the US or earnings of US corporations."

China is not inconsequential, and maybe the fall for stock prices would be smaller if the world’s second biggest economy was running faster, but it’s not the main game for Wall Street.

One big reason why I’m not scared about this stocks sell off is because the US economy is delivering. Today we learnt three US carmakers beat sales estimates last month and construction spending was up 0.7% in July.

And all this is happening even with a stronger greenback, which shows you that the US is on the comeback trail, which will prevent this stock market correction becoming a crash.

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