Some of the recent volatility may have less to do with investors' predictions of the future values of equities, and more with forced selling to meet liquidity demands and tax planning.
Don't get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough -- which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don't read too much into any move. Here are the five biggest dislocations taking place:
- Tax-loss selling ...
- Mutual-fund redemptions ...
- Mutual fund cap-gain distributions ...
- Hedge-fund redemptions ...
- Margin calls ...
Which means it's a good time to be buying if you don't need the cash!
I'm in the market for the long-term, which means the recent drops don't unsettle me much. I've been buying into the market as much as I'm able. So far, all those purchases have lost money! But since I don't know when the bottom will come, I'm not going to try to time it. In a few years, the people buying now will be a lot happier than the people selling.
