Where is the stock market headed?

My dad use to say, “you can’t get blood from a turnip“. When you hear this phase during your younger years, your thoughts tend to imagine a guy squeezing a turnip and hoping blood will come out. Your next thought is something along the lines of, “why would someone squeeze a turnip, to get blood?!”. My literal interpretation of the phase is: You cannot take something (blood) from a object that has none of it. Or, more specifically, you cannot take money or goods from someone that has nothing. The reason rich people need extensive insurance and poor people do not, is the fact that rich people have significantly more to lose.

The stock market (Dow) is hovering in the 6,000 range, but many say 5,000 is more likely than 7,000 over the next 6 months or so. I am a bull – a definite minority in today’s market environment. Not because I think the market could not fall another 10-30%, but because we are hitting a point where all of us have significantly less to lose than anytime in the last 5 years. I think we can all agree that realistically the stock market will NOT go to zero. We can also agree that, like any recession, this one will end….eventually. Buying stocks now seems like a no brainier to me. Assuming you have a reasonable time horizon, say 5 years, your potential down side is probably 20-30%, but your upside is probably 50-100% in that 5 year period.

In America, the pendulum always swings farther than it should in both directions (e.g., the stock market; housing market; etc. over-shoot on the upside and then over-shoot on the down side.) Contrary to the babbling of “talking heads” and bear market pundits, we are still a capitalistic country and our people believe in hard work, earned success, and a chance at the good life. Once we get past the negative consumer confidence we are all experiencing, individuals will re-ignite their buying and good companies will begin to thrive again – and take their stock price up with them.

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So, where is the market headed? My guess – down over the next 6 months, but significantly higher after that. If nobody knows where the bottom is, isn’t it prudent to invest now, after weighing the risk of the current environment against the potential upside profit.

* This is an edited guest post by Tony Parker, a contributor-at-large for Saving to Invest.

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