The stock market has recently delivered quite a ride for many investors. The word I hear most to describe the volatility is, roller coaster. However, the most common advice I hear in my industry is, don’t be emotional, don’t panic, the bull market is still alive.
Before addressing the common refrain that this recent market blip is/was just a correction in the midst of a continuing bull market, I too agree that panic is not wise behavior. Panic often leads to poor decisions, unless you really are being chased by a wild animal.
It is often cited that China is the reason for the recent market volatility. We all like to find a proximate cause for any change in our surroundings. Yes, the Chinese stock market is down nearly 40% in three short months. But, this has only erased a 60% gain during the three months prior to that.
Rather than pin the market downturn on China alone, I view it as a symptom of a larger, global economic ailment; one rooted in the very prescription used to quell the ‘08 credit crisis and subsequently slow global economic recovery.
I remember back to the ‘80s when my “little brother” – who now towers over me – used to play a simple computer game, SimEarth. In this game, the goal was to tweak the elemental makeup of the environment in order to spur the sustainable development of plant-life and the animal kingdom in a simulated world.
I had no interest in SimEarth back then and, voila, my brother became a scientist and I became a money manager! Who knew that SimEarth would now indirectly apply to my life’s work?
Since late 2007, central bankers around the world have been playing their own version of SimEarth. Their prescription was no less than a change in the basic rules of capitalism; zero interest rates for almost a decade.
Like the basic makeup of our natural atmosphere, interest rates act as the driving force behind all asset prices. The world of financial markets operates in a constant state of comparative analysis. Every investment choice is measured against an alternative with interest rates sitting at the center of the analysis. For at least the past decade, central banks have manipulated capitalism’s atmosphere.
Viewed in this context, the frantic chase for global riches in China, along with large amounts of capital rushing into other developing markets, is simply an outgrowth of the desperate reach for investment returns in a world of suppressed interest rates. The likely effects are artificially high asset prices and greater volatility near the end of the experiment.
With the US stock market, as measured by the Shiller P/E ratio, still valued at levels only seen in 1929, 1966 and during the tech and housing bubbles, it might not be such great advice to bank on the resumption of six-year old bull market. Panic, never. Plan and prepare, always.
