Look Out Below, Follow-Through Edition
Yesterday, we discussed the likelihood of an equity correction versus the end of the bull market. Today, futures are deep in the red, looking like another 1 percent sell-off or worse awaits us. European stocks are down 1 percent or more, with the IBEX off more than 2 percent. In Asia, it is a 2 percent whackage, although China has (so far) managed to hold on to small gains.
Perhaps on this philosophical Friday, it might be a good time to wonder aloud as to the causes of this change in fortunes. Why the sudden shift, from excess bullishness and exuberant expectations of more double-digit gains, to a recognition that perhaps the party won’t go on forever? You humans seem to desperately search for a simple narrative that explains complex events of unknown causation. An explanatory need not be accurate, only understandable and comforting. This is inherent in a species that has a rich tradition of storytelling. The narrative trumps data almost all of the time. The price action and misbehaviors of markets are certainly no different.
Hence, a correction is not simply the random meanderings of a complex system comprised of the buying and selling activities of millions of participants, but rather must have been caused by stocks that were too pricey, or earnings that have not lived up to expectations, or the development of big trouble in China. The problem with these rationalizations is that all of these things were well understood by markets -- and have been for some time. None are surprises, and none reflect information that is new or was especially unknown previously.
Indeed, despite a few high-profile blowups, earnings for S&P 500 companies that have already reported are tracking ahead of expectations. Is China’s ongoing market skittishness a surprise to anyone -- and besides, who really believes the Communist Party’s economic data anyway?
Is it the ending of the hated quantitative easing and the inevitability of higher rates? I know of no other central bank policy change that has been telegraphed with greater clarity and transparency than the taper and gradual withdrawal of the extraordinary accommodations of the Federal Reserve.
Some of the commentary about yesterday’s volatility tread the fine line between hilarity and absurdity. One TV commentator described the action in terms of “pain and carnage” normally reserved for war reporting. This for a market that is within a percent or two of its all-time highs. Amazing.
Regular readers of this site are fully cognizant that all markets go both up and down. This should not come as a surprise to any of you, but apparently there are still some newbies who have yet to learn this profound insight. Its not like the group of insiders that controls the markets meanderings have made any effort to hide this information. The 57 percent collapse in the markets from October 2007 to March 2009 should have provided some measure of warning that markets do indeed move in directions other than straight up.
Those who might seek to downplay the downside of investing need not worry -- they have the human tendency to utterly forget even the most recent lessons learned.
(Barry Ritholtz writes about finance, the economy and the business world for Bloomberg View.)