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What If The Dow Went Down To The 5,000 Level?

12 May 2010 5 Comments

CNBC has an article out regarding a strategist who is predicting that the Dow will hit 4200-5000 by mid-2011.  Now, don’t get me wrong, CNBC has a yahoo on the air every day predicting various stock market levels whether it’s way higher than now or way lower, so it’s tough to put a lot of stock into a single prediction like this.  In fact, if you’ve read The Black Swan by Taleb, you might think it’s impossible to judge where the stock market will be in the future.  I certainly believe this to some extent.

With that said, let’s analyze what might happen if the Dow were to crash to levels sub-5,000.  This would be a more than 50% drop from current levels.

Political Ramifications

If this happened, there’s a good chance that Obama might be finished in terms of getting re-elected.  The reality is the stock market is a guage of the economy for the mainstream American.  Most Americans don’t read detailed economic reports; instead, they look at the stock market.  As such, the political party in power will likely be punished for another market crash.

Main Street Pain

Unfortunately, another market crash would further demoralize many Americans.  For those of you that think “We’re back’ (as proclaimed by Newsweek), you will be shocked if and when the market crashes again.  Another hit to retirement funds and savings will make many individuals financial situations more ugly.  The reality is that economic activity increases when stocks are up.  People spend more money because they feel more wealthy when their equities accounts are up.  Yes, this is kind of stupid, but it’s true.

Would You Be OK?

Would you be OK if the market crashed?  If you can’t answer yes, then you might consider taking some necessary steps to shield yourself from such an event.  The reality is that I’d be fine with a stock market crash and I would welcome the opportunity to deploy cash into cheap stocks of quality companies.

In order to weather future storms that might be coming our way, you need to be prepared for them.  No this doesn’t mean you sell all your stocks, but maybe you should move towards a more cautious position.  Maybe you should accumulate some cash and be able to take advantage of a market crash rather than fear it.  No matter what happens on a broad economic scale, there will be opportunities for the smart and prepared people.  I hope to continue to help people be prepared for such opportunities with this blog.

5 Comments »

  • Kyle C. said:

    If the market crashed to the 5,000 level I was cry for a little a bit and the buy the crap out of everything that is on sale. I am still in my 20's so the odds of the market making a steady climb back up are pretty good. With the markets that low I could pump money into companies that are painfully undervalued and then over the years watch my nest egg rise with the return of the markets. Too many young people focus on the negative side of these drops when they have such a long time to retirement that it is really a positive for them.

  • 20smoney said:

    I agree!

  • Stephan said:

    Ya Kyle, thats exactly what i would do as well. but to be able to do tht, i wold need a pretty large sized emergency fund as a stock market that low most likely would mean moe job losses and higher unemployment

  • ERB said:

    While I agree that I'd use up nearly all of my cash reserves to bottom feed, I think most people would be pretty screwed if the market dropped by half at this point. A lot of people are just now regaining their trust in the market and have become fully invested again. Another blow would really shatter their portfolios, not to mention the massive shock it would have on the world economy.

    I also agree that those pundits on CNBC that make wild predictions are worthless. I'd go to a palm reader if I wanted the future told, just give me the news!

  • 20smoney said:

    ERB: I agree with you on how people would be screwed and your point is part of the reasoning why part of me thinks we haven't bottomed yet. People haven't been demoralized fully for a true bottom. Just a theory of mine though.