The brutal sell-off on Wall Street on Thursday, which resulted in the Dow losing 4-percent so far year-to-date, could very well be the mythical correction we've been hearing about for months. As I mentioned in a CNBC commentary earlier this year, the market did seem to be getting a bit ahead of itself.
It appears Europe's economic problems are finally getting under investors' skin - we now have an environment where Wall Street is reminded about 2008's financial meltdown, like a re-emerging bad memory. There were already brewing concerns about sovereign troubles in Europe; we now have facts and they don't look encouraging.
Latest data out of the U.S. weren't encouraging either - yes, the economy is stabilizing, but that doesn't mean its health is anywhere near robust. With 10% unemployment and employers continuing on the path of increased efficiency (which means strong hiring is not likely to occur in the near future), the world's biggest economy is likely to be distressed throughout 2010.
And that means more volatility for markets going forward. We expect a 10% correction and we are half way there. If news gets worse, expect more.
But as unpleasant as market drops may be, corrections are normal and necessary as valuations often get ahead of fundamentals. These pauses allow for more rational pricing. Drops also create opportunities for nimble investors. It's like shopping - don't miss out on the sales!
I personally like blue chips like General Electric, Johnsons & Johnsons and IBM , which are expected to do fine when the economy recovers.
Smart investing requires you to be cautious in your view, deliberate in your behavior, and contrarian in your actions. As Warren Buffet once said, the best time to buy is when other people want to sell.
Editor's Note: Disclosure - Michael Yoshikami does not personally own any of the above stocks.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.