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NEW YORK (AP) â¿¿ Stocks dropping across the globe. Six weeks of gains wiped out in the U.S. The biggest drop in the Dow Jones industrial average in 1 Â½ years.
It's easy to give into panic and sell along with everyone else. But there is a good case for staying calm.
Three reasons you may want to hold on to your stocks:
â¿¿ STRONGER ECONOMY: Nothing kills a stock rally like a recession. Four of the five previous bull markets ended as investors sold during a recession, or anticipated one.
Are we anywhere near a recession now? Quite the opposite. The economic recovery seems to be gaining traction.
Americans spent more at stores in May, despite higher payroll taxes. Sales of previously occupied homes last month topped five million at an annual rate for the first time in 3Â½ years.
Better yet, the jobs picture is brightening. Since October, employers have added an average of 196,500 jobs a month, up from 157,000 a month in the previous eight months. And unemployment, still relatively high at 7.6 percent, looks likely to head down. The Fed said Wednesday that it could fall as low as 7.2 percent this year, then down to 6.5 percent next year.
One warning: Recessions are difficult to predict, so anything is possible.
â¿¿ STOCKS SEEM REASONABLY VALUED: Major U.S. stock indexes have dropped more than 2 percent this month even though corporate profits are at a record high.
All else being equal, investors who buy now could be getting stocks at a good price.
One way to value stocks is to look at their price-earnings ratio. To calculate a P/E, you divide the price of a stock by its annual earnings per share. A company that earns $4 a share and has a $60 stock has a P/E of 15, for instance. The lower the P/E, the cheaper the stock.