Volume 3 Issue 34: Intelligent Investing

Volatility Is The Name Of The Game

Here is a chart of the S&P500 for the past 6 months:

S&P500

Just look at the plunge in the last few weeks. Then some rebound and then more plunging. Some say it is the credit rating downgrade, some say it is the weak economic conditions in the US and the Eurozone. But then look at the KLCI:

KLCI

The plunge is there too. Once investors started to worry about the US economy, they will start to worry about every other economy. The most frequently asked question would be, will the plunge continue? Have the stock market indices bottomed out?

If you look at the global economic environment, the issues and problems are endless:

1. Weak US economy 
Two years after the financial crisis, the unemployment rate of the US is still stuck at 9.1%. All the other indicators point to weak demand within the economy. There is even talk that the US might become the next Japan. However, I think this is unlikely. But I do believe that a recession is coming. If you have been following Bloomberg closely, you would have noticed that more and more fund managers and strategists are downgrading their outlook. While it is not in my habit to listen to other analysts, but we all know that the markets tend to fulfill itself. If everyone thinks it will go down, then it will.

2. Eurozone debt crisis 
For those of us who have a keener memory will remember that the talk about the debt crisis started all the way back in March 2010. This is a long-standing problem and there are no solutions in sight. What's worse is that it seems to be spreading to the bigger economies like Italy, Spain and France. Many things can go wrong from here as politicians continue to talk, talk and talk but there is no actual doing.

3. China's inflation muddle
As I mentioned in Two-Cent Economics, China's inflation problem is a delicate and difficult issue. It cannot let inflation spiral out of hand, and it cannot slow down its economy too fast. Once again, too many things can go wrong from this. No human can control the weather conditions. The most China can do is to cool down its demand. The supply side is out of their control. So far, Mother Nature has not been kind in 2011. Earthquake in Japan, droughts, floods, cyclones, more earthquakes, ash clouds and most recently, snow in New Zealand. Who would have thought of that?

4. The Middle East and North Africa
The political uprisings began in Tunisia in December 2010 and spread across all the other countries like Egypt,  Libya and Syria. The problems in Libya and Syria doesn't seem to be ending soon as more and more people get killed every day. Things can turn bad in so many different ways.

With so much uncertainly in the political and economic environment globally, all I can say is that, anything can go wrong. Not all of them will go wrong, but all it takes is a few of the things to go wrong and the stock markets will plunge like no other. The best thing to do right now is to do your homework. Look out for good companies, and build up your war chest. Save up your cash. When things go bad, good stocks are going to look cheap. In times of war, prepare for peace. In times of peace, prepare for war. Those are the great words of Sun Tzu.