The Dow Drops 512 Points; Now What?

By on August 4, 2011 in Current Events with 87 Comments

The stock market is in the midst of its biggest retreat since the financial crisis, culminating, at the time of this writing at least, with the 512 point drop on Thursday, August 4. Investor concern is increasing about the possibility of a double dip recession in the U.S. and a debt crisis in Europe which has driven the market lower.

The TSP funds took a hit on Thursday too: the C fund dropped about 4.7%, the S fund dropped about 6.2%, and the I fund was down about 6.3% on the day.

So what should investors do going forward? What does this mean for your TSP funds?

Three different financial experts weighed in on the market drop today. The general consensus: don’t panic, don’t follow the herd, and you should seriously consider being a contrarian and stepping up your buying since stocks are on sale in the midst of the decline.

Personal money management expert and national radio personality Dave Ramsey said he was considering putting a bunch of money into the market: “I may drop some serious cash in the market. I don’t like timing the market, but when it drops like this it makes me really tempted to invest. I feel like I’m in K-Mart and the blue light is on.”

Ramsey advised one caller on his show about the TSP specifically with an investment she was considering: “I’d go heavy in the C, like 80%; that’s where you get to invest in the stock market while it’s down.” She said she was in the C, S, and I funds currently, and he said that was “perfect.”

Rob Morgan, Chief Investment Strategist of Fulcrum Securities, mirrored Ramsey’s sentiments. When asked about the recent drop, Morgan said, “I think it’s a correction, I don’t think it’s a bear market. In a long term bull market, which I think we are still in, you usually have several phases of corrections. That helps demarcate the various stages of a bull market.”

Morgan also implied that there may be a little farther to fall before this correction is done: “I think it’s a correction that will give a good buying opportunity, but at the same time you don’t want to stand in front of a moving freight train, as stocks are still falling as we speak.”

Statistics from the TSP show that at market peaks and bottoms, investors demonstrate a “follow the herd” mentality, moving money to the safety of the G fund at market bottoms and putting money into the stock funds near the market’s peaks.

Chief Economist Brian Wesbury of First Trust Advisors in Illinois had some thoughts on the herd mentality you often find among investors. He said, “People think we are in a recession, and they have for the last two years, but the economy is still growing. Chain store sales are up 4.6% this July over last July; car sales are up 6.9% in July over June. The data is getting a little better and people are just not wanting to focus on it.”

Wesbury admitted that people are more nervous today than he’s seen in his 30 years in the industry. He said people are ignoring good news, but he said it’s there, and he thinks it will ultimately supersede the bad.

So what’s making people so nervous today? Wesbury has a theory:

“I think the real underlying problem is the size of the government. Every dollar the government spends it either has to tax or borrow from the private sector, so it’s a real simple math formula: the bigger the government, the smaller the private sector. Then the smaller the private sector, the fewer the jobs. Some people believe that government spending creates jobs, but what they don’t realize is that every job the government creates, that costs a job in the private sector, so you have a negative impact on the economy at that point. If you look at Europe over the last 30 years, they have always had a higher unemployment rate than the United States with big government and high taxes. Now we are behaving a lot more like Europe, so that’s why our economy is growing, but it’s not growing as rapidly as it could because we’ve burdened it with such big government.”

When asked about the value of stocks going forward, Wesbury was optimistic: “I don’t believe we’re going to fall into another double dip recession. The stock market is so cheap; the price to earnings ratio is less than 12 on this next year’s earnings. This is the time to buy equities and take risk, not to dig a hole and buy T-bills and gold.”

So are these financial experts right? Should you dump everything in the G and F funds and go all into the C, S, and I funds? That is a decision only you can make. Remember that ultimately nobody can predict the future with 100% accuracy. Consulting a qualified financial advisor is always prudent before making decisions with your life’s savings.

© 2016 Ian Smith. All rights reserved. This article may not be reproduced without express written consent from Ian Smith.

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Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce. Ian also has a background in web development and does the technical work for the FedSmith.com web site and its sibling sites.

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