Sunday, August 12, 2007

New Life For The Bull Market - For Now

"Those who cannot remember the past are condemned to repeat it." - George Santayana

On Friday, it finally happened. New life was breathed into the bull market. The Fed made the statement that it would provide "reserves as necessary" to stabilize credit markets. The European and Japanese central banks are also pumping money into the markets. In addition, the markets are now predicting that it is highly like the Fed will lower interest rates at its September, 2007 meeting.

Hmmm...........When I have I seen this happen before? 1997? 1999? It's time to get ready for the ride, both up and down.

In 1997, the Thai Baht collapsed and led to the East Asian Financial Crisis. The result was that creditors withdrew funds from the region, affecting additional countries. The International Monetary Fund (IMF) stepped in and provided the largest loans in its history and arranged for financing from other countries. A bigger crisis was averted by this liquidity infusion and stock markets resumed their meteoric rise.

In 1999, there was great fear that Y2K would create significant issues leading to an eventual financial crisis. Preemptively, the Fed lowered interest rates to provide support. No significant Y2K disruption occurred. The markets responded and continued to rise.

However, the stock market would only been fueled for a couple more years.

Initially, the bubble began to burst in 2000 with the decline and NASDAQ fall and was followed by the stock market downturn of 2002.

Today, I see the market in a similar situation. A housing bubble, a credit crunch and liquidity crisis . The Fed, European and Japanese central banks will deliver the liquidity needed to prevent a market downturn ..... for now. Cheap money will become available, markets will settle, investors will return, leading to a rise in the market into 2008.

After 2008 (or perhaps sooner), history indicates there will be a downturn and correction. I will try to be prepared for this correction, but not by getting out of the market. For me, I will work with my financial advisor to have a diversified asset portfolio (e.g. equity, fixed income, and cash equivalents), and have good diversification in my stock portfolio. Based on the most recent correction in 2000 -2002 , it seemed portfolios invested only in the tech sectors had the worst performance, while diversified asset and equity portfolios have recovered in the ensuing years. For now, I will go with what's worked well in previous downturns.

For more on New Beginnings, check back every Sunday for the next segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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