Is it 2008 again?

It seems like 2008 all over again. Not counting the snapback today, for the last month, S&P 500 is down 17%, close to “official” bear market territory. The index fell an astounding 11% in just three days. The fear indicator is at the yearly high, and headlines about “market turmoil” dominate the news.

All of that is indeed very frightening. But we have been through similar turmoil before. Events in 1987, 1991, 1998, 2000-2002, and, of course, 2008, were very frightening indeed. But markets recovered each and every time. So my take on this is as it has always been – I remind myself that I am a long term investor, that sharp market drops have occurred and will occur in the future, and that it is crucial to stay calm and not make emotional decisions. And this approach proved itself over the years – since 2004, those of you who invested alongside with me saw your portfolios grow 40% compared to 13% for S&P 500.

Now, what happened to the markets this time around? Three major concerns were brewing for the last several months. First, a number of reports pointing to slowing U.S. economy. Second, worsening debt problems in South European countries. Finally, debt ceiling drama here at home. These concerns were brought to investors’ attention during the last week, especially after questions were raised (again) about debt burden of Spain and Italy. Add to that first ever U.S. rating downgrade (which seems to be politically motivated), and you have a recipe for full-fledged market panic. But once again, some perspective — the correction so far is only one percentage point greater than the one last year (after which markets climbed some 30%). But it happened a lot faster this time, and so it seems a lot scarier.

But here are some good news. The earnings season was, once again, excellent, with vast majority of firms exceeding estimates and many offering higher forward guidance. So, there seems to be a disconnect between great earnings reports and poor economic indicators. There are several explanations for this discrepancy:

– higher worker productivity creates higher profitability (unemployment remains high).
– major corporations are multi-national, deriving a huge part of revenue from overseas (no help to domestic economy).
– weak dollar helps both top and bottom line.

No one knows for sure what is going to happen with debt problems in Europe (at least, now that debt ceiling deal in U.S. has been reached, no default here until 2012) or with the economy. It has been my long-standing belief that it is far more productive to concentrate on the companies I invest in, rather than on macroeconomic issues. After all, it is the earnings, not economic reports, that ultimately drive stock performance. Unlike countries themselves, many companies are in excellent financial shape, they have huge cash hoards that allow them to weather any downturns. Being a partial owner of such companies will, as always, be rewarded.