Stock market drop is okay

Well, that was a heck of a week. The stock market rally that began last fall suddenly fizzled out, at least partly in reaction to Alan Greenspan’s cautionary words in mid-January.

And guess what? I’m not distressed.

The markets had been on a tear since late September. First it was bargain-hunting and later, panic buying by investors who had been sitting in cash and were afraid of missing out on the first leg of a new bull.

The surge was a great boost to investor morale in the aftermath of September 11th .

Trouble spots ahead
But it was based more on hope than reality. Greenspan brought everyone back to earth with his pronouncement that there are still some troublesome areas in the economy that may preclude an early recovery.

The comments of the Fed chairman werfollowed by announcements from Intel, Microsoft, and IBM. While not unduly pessimistic, these certainly suggest that the technology industry has a long way to go before we can say confidently that a robust rebound is underway.

Tech shares, which had been the leaders in the fall turnaround, suffered accordingly. The Nasdaq Composite gave up 4.6 per cent. The rest of the market followed the Nasdaq down, although not as sharply.

Pull-back is healthy
I regard this pull-back as healthy. And it wouldn’t disturb me if the markets came off some more as long as the retreat doesn’t turn into a rout.

I would feel much more comfortable with a gradual, sustainable upward trend in stocks, as opposed to the spike-like jumps we saw in recent months.

Where to focus

  • Equities are certainly where your focus should be at this time.

  • Cash-type securities like money market funds are yielding almost nothing.

Even those tiny yields are going to slip more in the next few weeks, reflecting the latest Bank of Canada rate cut and the expected move down by the Fed later this month.

  • Bonds do not look attractive in this climate.

  • Stocks, however, represent good value, especially on market retreats such as we
    saw last week.

As always, however, it’s essential to choose carefully. Under no circumstances should you overpay right now.

Adapted from the Jan. 21 edition of the Internet Wealth Builder.