Global Turmoil Hitting Stocks Could Be a Buying Opportunity
The tremors from Europe and China are sparking selloffs in stocks, but the turmoil could be setting up the US market for a strong buying opportunity, strategists say.
Stocks have wobbled through much of 2010, thanks in large part to worries about the debt crisis in Greece and other members of the European Union as well as China's recent efforts to slow its rapidly growing economy.
As those developments have prompted some nervous investors to sell stocks and lock in profits, others have moved in to take advantage of the market dips.
"It's just an excuse to take some money off the table," Michael Cohn, chief investment strategist at Global Arena Investment Management in New York, says of market drops like Friday's. "There are going to be these fits and starts. We had the rise off the panic bottom but we're still in a long-term bear market. Until the bear market is over the market is going to chop around."
Wall Street is coming off a 60 percent rally from the March lows that showed no signs of stopping. Investors disregarded rising unemployment, weak earnings and a generally dismal outlook to snap up stocks and rebuild cash-laden risk-averse portfolios.
But 2010 has been a different story.
Tremors like the debt crisis in Greeceand the unexpectedly rapid moves in China to increase capital requirements for banks have rattled the markets in a way that global moves could not during the rally.
The result has been some fairly steep sell-offs that some portfolio managers have been using to scout out value.
"With new money coming into clients' accounts we're dollar-cost averaging on these kinds of dips," Larry Rosenthal, president of Financial Planning Services, said in a CNBC interview. "I think it represents a wonderful buying opportunity."
Dollar-cost averaging entails investing consistent amounts in the market over intervals; during a market drop buying more of a certain stock would lower the price point an investor would need to break even.
The strategy could be especially important at a time when the market seems to lack direction.
The Dow has done little since crossing the 10,000 threshold Nov. 5 as the global events have played out. Investors looking to book profits may have to do quickly in this environment.
"Down at 9,800 I'm a buyer, up at 10,300 I'm a seller. I bet you I could play that game five times over this year," Cohn says of the Dow moves. "Position your portfolio for the long haul, but keep 15 to 20 percent cash and play around a little bit on the short-term side—kind of ring the register a little bit."
Even with that strategy there is risk to investors who wait too long either way.
"You've got to just be very careful that you don't take too much risk in your portfolio on a dip because nobody has a crystal ball," Roy Williams, CEO at Prestige Wealth Management, told CNBC. "We could have a 10, 15 percent correction but by year-end markets will be higher because it's going to be earnings and growth to the economies around the world."
Rosenthal also believes the US market will be able to overcome difficulties around the world even if stocks do gyrate some at the moment.
"Long-term I'm very bullish," he said. "We have been through a tremendous recession worldwide and now we are starting to see the budding stages of a new economic expansion."