The Wall Street Journal-20080213-Common Sense- Buying Into the Stimulus Offers a Warm Feeling

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Common Sense: Buying Into the Stimulus Offers a Warm Feeling

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SmartMoney

I was walking by a clothing store last week when I did my patriotic duty: I went in and bought a winter coat, marked down 50%. With taxes included, it came to about $500.

Obviously, I didn't wait to receive a check from the government, part of the stimulus package recently passed by both houses of Congress that President Bush has promised to sign. I may not qualify for anything -- individuals get up to $600, which is phased out if you earn more than $75,000 -- but that didn't stop me from getting into the spirit of the measure.

I still remember the last rebate, designed to stimulate the economy after the Sept. 11, 2001, terrorist attacks. I used that money to buy a pair of shoes, which I'm still wearing. Those shoes were made in France; my new coat in Italy. So I'm also doing my part for globalization. Would it have been even more patriotic to buy strictly American products? Not necessarily. The local retailers got their cut, and for all I know those French and Italian garment workers are using their income to buy an iPod, or some other American product made more affordable by the weak dollar.

I'm not an economist, but I think the stimulus package will have some positive benefit, even if short term. Longer term, the Federal Reserve's swift cuts in interest rates last month mark a departure from the more-measured campaigns of former Fed Chairman Alan Greenspan. This should provide a longer-term stimulus, not to mention a cushion under the banking system, which should benefit from a yield curve that has returned to its upward slope. This makes it easier for banks to borrow at lower rates and lend at higher long-term rates, a traditional formula for profitability.

I'm not saying we're out of the woods yet. Obviously, the Fed itself was taken by surprise by the sudden economic downturn that evidently materialized in December and January. But I'm not in the camp that feels we're in for a severe slump, with stocks dropping a further 10% to 20%. Stocks are already well off their October highs: Last month the Nasdaq Composite grazed the 20% decline that typically indicates a bear market, and the Dow Jones Industrial Average and S&P 500-stock index weren't far behind. I've been buying stocks at each 10% drop, and will do so again if we reach the next threshold (2060 on the Nasdaq Composite).

The reason I use 10% declines is that the average decline in the Nasdaq (my preferred benchmark) since 1979 has been about 20%. I use half of that, or 10%, as a threshold. But I recognize that stock indexes will drop more than 20% in many bear markets. I recently read that the average decline of the S&P 500 in recessions was 26%. That's just a few percentage points lower than the levels reached in January.

It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom. I stick to a disciplined system of buying on the way down, when stocks are cheaper. Right now, they're cheaper, but they won't be forever. All bear markets come to an end eventually.

Stocks aren't the only things that are cheaper. On my recent shopping excursion practically everything in the store sported deep discounts. I realize one winter coat isn't going to make or break the economy, but spending is a vote of confidence in the future. Collectively, it could give the economy a boost just when it needs it. In that regard, I'm happy to do my part.

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James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.