Where Do We Go From Here?

By Frank J. Gavel, Jr

The stock market has been experiencing unprecedented growth and volatility. The changes that are currently taking place in our capital markets are happening at speeds no one could have anticipated. As we step forward into a new century, it may be helpful to take a step back from all the frenzy of today’s markets and revisit the markets of the past nine decades.

To give the average investor some perspective, the Dow Jones Industrial Average (DJIA) did not cross the 100 point barrier until 1906. While it is not incomprehensible to believe the DJIA could go from 100 to 11,000 in 95 years, it is amazing that the DJIA did not close over 4,000 until 1991. 63% of our last century’s growth has come in the last 8 years. For those of you who have never seen a down market, history suggests we may be due for some type of correction.

Now do not get me wrong, I am as impressed as the next financial professional with the unprecedented growth of the global capital markets. However, the idea that the markets may continue to go up forever without any correction would be unprecedented. While I will grant you the technology-based markets of today are quite different from the industrial based markets of the past, historical data shows us that markets will eventually correct. I agree that there is a good chance that we are in a “New Paradigm,” but if we are, it has hardly defined itself within the past 5 years. Regardless, investors only have to look back to the 1980s when the biotech craze was engulfing the markets. Numerous biotech companies came public and investors paid unheard-of price/valuations for these stocks. It appeared as if they would never stop going up. Unfortunately, investors of that time remember how quickly and how severely that industry corrected.

As we progress forward into the new millennium, there is no question that the Internet and advances in technology have permanently changed the global equity markets. Moreover, the dynamic companies that develop these technologies are commanding extreme price/valuations in the marketplace. My hope, as a financial advisor, is that investors will take a deep breath and examine the situation carefully. There is still a need to develop long-term investment plans that takes risk and asset allocation into account. Moreover, there is as great a need not to get swept up in the day trading mentality that may expose investors to financial risk or loss that will be difficult or impossible to absorb.

The markets of the new millennium may be more dynamic and powerful than any we have ever seen. Investors who stick to a long-term financial plan should be able to prudently participate in the opportunities that will develop.

(Frank J. Gavel, Jr is a financial advisor)