Tough Day for the Market

Of all the lessons this economic crisis has taught us, patience and flexibility are at the top of the list. And yesterday was another lesson in both.

The Dow slumped in afternoon trading to close 427 points lower. While that was the first time the index had closed below 8,000 since 2003, it did not push through the October 10th intraday low of 7,773.71—which I still consider the bottom.

I told you the declines of November 13 were a successful “retest” of the market lows, and the story was the same yesterday.

So what happened? Well, the market responded to minutes of the Federal Reserve’s October meeting that showed Bernanke & Co. expect economic conditions to sharply worsen next year.

You see, most economists were already expecting a tough first quarter, but the Fed said it thinks the economy will remain very weak through at least the first half of next year, and that a noticeable recovery is still a ways off in their opinion.

The group indicated that it would probably cut interest rates again at its next meeting on December 16 to stop the U.S. economy from unraveling completely.

The Fed’s grim outlook for 2009 was just the icing on the cake. Earlier in the day, the Big Three in the auto sector pitched their case on Capital Hill for a government bailout, and Congress seemed none too willing to play ball. In financials, Citigroup showed further signs of trouble and announced plans to buy back $17.4 billion in Structured Investment Vehicle assets in an effort to end its exposure to these risky investments.

Clearly, there are a lot of difficulties still ahead for the U.S. economy. Just today, for instance, the Labor Department said that new claims for unemployment benefits jumped to a 16-year high last week. This is yet another indication that the job market continues to weaken.

The bottom line is as we wait for banks and businesses to rebuild balance sheets, house prices to stabilize and the credit crisis to thaw, we must be willing to adapt to the side effects of the greater economic problem—namely, reduced spending, stricter credit and rising unemployment.

As investors, we must take these lessons to heart and apply them to our own strategy. Discipline is key, and as long as we take into account the challenges still facing businesses and consumers, we can zero in on the companies that have found ways to overcome those challenges and offer their shareholders value.

It won’t happen overnight, but an economic recovery is taking place. Investors are ready to turn the page on this chapter. Despite the market's losses, the October 10th lows have held up so far. This is good news and another sign that the market is bouncing along the bottom. This is how bases are formed, and it’s only a matter of time before the market trends higher!

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