Financial Focus: Why 2011 isn't 2008 - Ahwatukee Foothills News: Business

Financial Focus: Why 2011 isn't 2008

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Joseph Ortiz

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Posted: Friday, August 19, 2011 5:00 pm | Updated: 4:34 pm, Thu Nov 17, 2011.

With the recent headlines and stock market volatility, you may be wondering if we are seeing a repeat of the market activity of 2008.

Recently, stocks declined sharply in response to the U.S. debt downgrade, continuing European sovereign debt troubles and concerns about a general slowdown in the global economy.

And, at the same time these issues are occurring, the market is also growing increasingly concerned about slowing economic growth at home based on recent economic reports. Uncertainty often creates volatility.

We believe the market is seeing a shift in how much risk investors are willing to take amid these near-term distractions, causing stocks to decline in the short-run.

While big market declines can make you nervous, it's important to note that, even with the most recent pullback, the stock market is up more than 60 percent from its lows in March 2009.

Memories of 2008

What we're going through today may evoke memories of 2008. We don't believe this is a repeat of 2008, however, because there are fundamental differences in economic and market conditions. We believe this is good news for long-term investors. Specifically:

• Economic growth remains sluggish but positive. While the economy grew just 0.8 percent in the first half of the year, most economists expect it to pick up in the second half. Recent economic reports are consistent with slow, but positive growth. While slower than many had hoped, economic growth is expected to be positive in 2011. It shrank in 2008.

• Job growth has nearly doubled this year. Almost 1 million jobs were added in the first seven months of 2011, about the same as in all of 2010. The economy was shedding jobs in 2008, not adding them (Source: Bureau of Labor Statistics, July 2011).

• Corporate earnings are on a record pace. Corporate earnings are expected to reach a record high this quarter, while they were declining in 2008. The S&P 500 earnings are up about 12 percent over the past year. (Source: Standard & Poor's, Bloomberg; Estimates as of Aug. 9, 2011).

Typically, a lower price to earnings ratio (P/E ratio) signifies attractive pricing value. And since stock prices haven't kept pace with earnings, the S&P 500 is trading at about 10 times forward operating earnings.

This is well below its historical average of 15 times earnings. While past performance does not guarantee future results, we believe this represents an attractive value for investors.

• Oil prices are lower. Oil prices have fallen below $90, giving consumers some help. They soared to nearly $150 in 2008.

• U.S. financial companies in general are in better shape. Many companies are much better capitalized and have reduced risks in their businesses, and regulations have increased. While challenges remain, we don't believe risks within the financial system are nearly as high as 2008.

What should long-term investors do?

This is one of the hardest parts of being a long-term investor. It's easy to stay the course when markets are rising. It's harder to stay the course during declines and view them as potential investing opportunities.

But that's what being a long-term investor is all about. Remember:

• This is what it feels like to buy low. A stock market decline of 10 percent has occurred about once a year since 1900. These declines are typically opportunities for adding quality stocks, especially if you may not own enough equities.

• Reposition equities and rebalance if needed. Consider adding quality stocks, especially those that have a track record of increasing their dividends.

• Stay invested. A diversified portfolio of quality investments is a sensible strategy during volatile markets.

Stay calm, stay invested and work with your financial advisor to look for opportunities to help you stay on track to reach your long-term financial goals.

Dividends can be increased, decreased or eliminated at any point without notice.

The S&P 500 is an unmanaged index and is not available for direct investment.

• This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Joseph B. Ortiz, CRPS. Reach Ortiz at (480) 753-7664 or joseph.ortiz@edwardjones.com. Chartered Retirement Plans Specialist and CRPS are registered service marks of the College for Financial Planning.

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