Despite the terrible circumstances that grip the economy and the stock market, I believe we will pull out of this mess.
The only question in my mind is when it will happen.
Most stock investors take a long-term view and, if you can afford to hold on to that timeframe, I believe the economy and market will right itself (with some help from the government).
If we do not become mired in stagflation, I believe the stock market will come roaring back.
Before that can happen, investors must once again feel confident about the economy and the stock market.
For stock investors, a lack of confidence is the most difficult problem to overcome.
When professional investors get a hint that the economy may do an about-face, they could lead a huge amount of cash back into the market.
Frequently, the stock market precedes the economy in recovery. This makes sense because stock investors are generally more concerned about the future than they are the present.
It also makes sense because we can measure stock market performance in real time while economic indicators often lag by weeks or months – you may not know what happened until some lengthy time after the fact.
Of course, we are in some uncharted waters with this economy, so previous reactions by the stock market may not be counted on to predict the future.
There is no doubt that much value has been lost in the market and many investors (both institutional and individual) are sitting on the sidelines with large hordes of cash.
If there is a reliable sign that the market has turned around or is beginning a turnaround, much of that money will likely rush back in to the stock market.
When buyers flood the market, prices go up. However, it is my belief that investors coming back into the market will be more concerned than ever about safety.
That means large-cap, low-debt and cash rich companies will be prime investment targets.
Of course, the economy may not turn or may stall for an extended period, but those are the risks you take to capture superior returns.
It’s not investing if there are no risks.