Blessed by the Potato

Well, it seems to be a theme here lately that I try to reassure myself that the equity world is not ending. Since asking when will we hit bottom?, there has been a terrible week on the market. So again I have to wonder, how low can it go? How bad can it be?

The credit crisis is, obviously, nasty. There is a lot of fear out there. And we are probably heading into a recession, a nasty one from the looks of things.

However, the stock market is down something like 40% now, over 15% this week alone (down over 20% in the US S&P500). We’re just about back to where we were in the trough that followed the tech bust when stocks were not exactly overvalued. So how bad can it be? Have we really wiped out 6 years worth of growth and value? Are earnings going forward going to be 40% less than what they were last year?

I’m profoundly unqualified to answer those questions with any certainty, but my feelings are that we must be getting near the bottom of this market. I don’t think we’re heading into a depression; I don’t think owning pieces of large companies is going to go out of style and become a worthless hobby. Still, it’s hard to psych yourself into buying stocks.

However, I’m also more fearful than I have been previously. Credit is becoming less available, which makes me think that my LoC is not sufficient for my emergency fund, and that it’s time to start keeping some cash outside the market.

Also, huge daily drops like this feed on each other due to the leverage in the margin buying. People who borrow to buy stocks have a limit on how much they’re allowed to borrow. Once a stock falls too much, they can be forced to sell some in order to bring their loans (margin) back into balance, which can then drive stocks lower in a positive feedback cycle that feeds on itself. However, it’s got to stop at some point. At some point, the market will recover (though that might be 10+ years from now).