photo by Associated Press

Written by Dave Young, President of Paragon Wealth Management

The Dow Industrials dropped 512 points today. It is the worst point drop since 2008. Over the past 10 days the Dow has lost 1341 points or about 10 percent of its value.

Why have we seen these steep losses in such a short amount of time?

As we’ve seen in the past, it starts with our “leaders”. President Obama and his Senate seem to have one focus. Their focus has been to spend every dime they can find. This administration has taken government spending to an entirely new level. Unfortunately, when they can’t find any more money, they borrow it from our grandchildren and keep spending. That mentally has put us 14 trillion dollars in debt.

The House of Representatives told the White House and Senate to slow down the spending spree before they bankrupted us. A new player in politics, the Tea Party, took the position of an interventionist to an alcoholic. They told the entire group to stop their spending now.

No more compromises, no more kicking the can down the road… Just stop now. 

All of that drama started the market tumbling initially. We anticipated that once the politicians did something, anything, the markets would recover. Our belief was that the initial sell-off was artificially caused by the debt limit drama. That made it very difficult for us to sell and raise cash. Raising cash is the last thing you want to do when you expect the market to snap back to the upside. Surprisingly, after an initial jump higher the morning after the agreement, the market continued lower.

Essentially, the debt agreement gave more money for Washington to spend in the near-term for a promise to cut spending later, once someone else, “a committee” figures out what to cut. Apparently that wasn’t enough to soothe the markets.

Unfortunately, then Europe decided to join the party. Investors decided that Spain and Italy weren’t getting enough of a bailout so the European markets started selling. The European markets closed down hard, right before our markets opened yesterday and today. That was enough to send everyone into a panic. What happens when you panic? You sell.

So where does that leave us?

On the positive side, investors “usually” buy stocks because of the earnings power of the stock they are buying. Corporate earnings are the highest they have been in four years. Corporations have generally been “knocking it out of the park” with their earnings. Corporations are lean and mean and very profitable. Stock valuations are very good. So in theory, stocks should be gaining in value.

At the same time, we have a weakening economy, high unemployment and inept politicians in charge. These factors all throw fear and uncertainty into the equation. Fear and uncertainty usually translate into selling.

But at some point, we run out of investors who are selling because of their fear and uncertainty. At that point, when the sellers are exhausted, buyers will enter into the picture and start buying up the bargains that exist… because of the reasons listed.

The problem is that no one rings a bell to identify when the selling has ended. We do know that stocks are 10 percent cheaper than they were 10 days ago, and there are a lot of reasons to buy them. Over the long-term, this should be a good buying opportunity. In the short term, it’s anyone’s guess.

At these prices, it seems that stocks have already priced another recession. Our data indicates that the last few months have just been a soft patch in the economy and the second half of the year should be much stronger.

We don’t see a double dip recession ahead. 

The problem is that if everyone scares themselves to death, then the fear could gain momentum and create a self induced recession. It would be unnecessary and we don’t think it will happen, but it is possible.

In the end, recent corporate earnings have been exceptionally strong, investor sentiment is very negative (which is good for stocks) and market valuations are low. Overall, these are usually positive indicators for the stock market.

We will continue to follow our models. Stay tuned. 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.