Ignore the Market, Watch the Data
Sensationalists are warning that recent declines in stock prices are the start of a crash. While that may be possible, it's hard to see why. And even if stock returns during the next few years are disappointing, that still won't tell us much about the U.S. economy.
First, let's note that the Standard & Poor's 500 Index is down about 3.2 percent from its high of a little more than a week ago. The biotech and Internet stocks that had gone up the most took the biggest hits, with declines of about 20 percent from their recent highs.
Some perspective is in order. U.S. shares are up about 30 percent since the start of 2013. After a brief stumble at the end of January, the S&P 500 reached all-time highs. The recent decline is a blip when put into context.
Besides, there are other financial markets out there suggesting that all is well. One of the best ways to judge whether investors are nervous is to look at the option-adjusted spread of junk-bond yields against U.S. Treasury debt of comparable maturity. This fear index has been heading straight down for two years and is now lower than it was before the start of the crisis in August 2007.
Investors now think that highly indebted companies are less likely to default than at any point since the recovery began. Just by way of background, junk-bond spreads started rising a few months before the last cyclical stock market peak in October 2007, if you want to have a reason to trust the fixed-income market more than the equity market.
There also hasn't been any move in U.S. Treasuries, which contain estimates of growth and inflation. When the economy is expanding, fewer investors want to own low-yielding assets that offer limited appreciation in exchange for safety. If something bad were happening in the U.S. economy, you would expect bond yields to fall. That hasn't happened.
There are also plenty of real economic data, such as tax withholdings, that indicate the economy is getting stronger.
My suggestion: Ignore the fear-mongers, the day-traders and the hysterical wing of the financial news media. Don't make big changes to your portfolio or hoard canned food just because a few expensive tech companies are now a little less expensive. If I'm wrong and we end up repeating 1929, just remember that I would have spent today relaxing on my super-yacht if I really knew what the markets were going to do, instead of writing this post.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)
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