What goes up…must come down…and
up…and down
October of 2014 has been an interesting month so far, just
in the first seven trading days. In
seven days, the Dow Jones 30 industrials have moved (up and down) over 1,300
points. That is significant volatility,
especially since the movement tends to oscillate, in an ugly fashion
reminiscent of early 2009. I can’t help
but wonder why. Market movements are of
course related to human behavior: Mr.
Market (as Warren Buffet calls the market), can’t make up his mind if he’s
bullish or bearish. Lately, it’s almost
an even bounce: down 270, up 270. What’s the cause, and what do we do? We could attribute this to a variety of
causes:
·
Ebola. Ebola is a significant problem, both from a
pandemic standpoint and economic standpoint.
Western African nations stand to lose possibly more than $32 billion of
economic growth, just when they were getting out of the woods. On the other hand, the S&P 500 lost about
the same amount on October 9th.
So far, one person has died in the US (out of 330 million people) and
three in the EU. From a global
standpoint, the death rate is bad, but it stands at 0.000001% of the world
population. The Ebola outbreak started
earlier this year, and the market seemed to shrug it off. I’ll suggest Ebola is sinister, but maybe not
the major fear driver.
·
ISIS. ISIS is a significant problem, actually more
deadly than Ebola. ISIS has killed, by
reports in July, over 5,600 civilians in Iraq alone. And, like Ebola, ISIS seems to be spreading
(and possibly treatable), with a couple of billion dollars, tens of thousands
of fighters and some very good (our) military hardware. However, ISIS has been around for a while, is
sinister, but we’ve had bigger and badder opponents. ISIS is a fear driver.
·
North
Korea. Huh? North Korea?
Haven’t heard anything from them.
That’s exactly the problem. We
haven’t even seen little Kim Jong-un since September 3. Is he around?
·
Mario
Dragi. Now we may have
something. The head of the European Central
Bank (ECB) promised he would take all steps to get the EU out of
recession. However, all steps appear to
involve only talking. The ECB has not
engaged in any serious monetary policy (at least compared to the US Fed). As a result, we’re now seeing signs of
weakness in the German manufacturing economy.
Maybe we can remember when the Grecians didn’t have a formula. Right now, it’s possible the ECB doesn’t have
one. Definite headwind.
·
US
Economy. Back to good news. The US economy saw a drop in unemployment
(down to 5.9%), and the dollar is rising (don’t get too excited: a strong
dollar is a double edged sword). Exports
are up, bankruptcies are down. Business
optimism is up, but business confidence is down. The bellwether consumer confidence is up, as
are retail sales and consumer spending. The US economy is providing a nice
tailwind.
·
Interest
Rates (US). I only say US because
the bond market is kind of silly right now.
The 10-year Spanish bond is at an all-time low yield (a hair over 2%),
lower than the US 10-year, which is at a 15-month low. By way of reference, Spain’s GDP is shrinking
at a rate of 1.2%, compared to the US’s growing rate (2.9-4.65%, depending on
how you measure it). Spain’s
unemployment rate is 24.5% (versus our 5.9%).
Yet those Spanish bonds are considered lower risk? The simpler reason is that our Fed is ahead
of the European’s, already tapering their bond buying, and trying to get our
rates higher, which is good for everybody. (As long as they are not too
high). I’ll say the threat of inflation
is modest, compared to the benefits of somewhat higher interest rates. This is a tailwind. And think about it: what sounds better, a Spanish bond paying 2%
in euros or a nice global stock paying 3.6% in a dividend in dollars?
·
Elections. I could say that TV advertising will be off
significantly after November 4. I’ll use
the mute button less, but the outcome will probably be rather
anticlimactic. As long as there is rancor
in Washington, the sequester forces the deficit to be reduced. So the infighting is actually good at cutting
the budget, albeit not in the way anyone really wants it to be cut. But, as a wise man once said, “gridlock is
good.” I predict continued gridlock,
which means no tax cuts or increases, and less spending. Election results are
probably a non-factor.
·
The
‘Orange Car’ syndrome. There’s a psychological exercise that we find
what we look for. Try it: for 48 hours, count how many orange cars you
see. You probably never noticed them
before (unless you drive an orange car), but now you start looking for them and
they appear everywhere. The last time we
had a 10% decline in the S&P 500 was the third quarter of 2011, over 1,100
days ago. This is on a market that is up
189% off its 2009 lows. Many investors
are waiting for the correction to buy.
And maybe, if you look hard enough for a correction (or an orange car),
you’ll find one. (I saw 38 orange cars
in a 48 hour period).
See why the market is getting volatile? World jitters, behavior, economic data. But when this happens, recognize that
volatility provides the opportunity to rebalance, the opportunity to re-price
and more importantly, the opportunity to let markets regroup. My take is that global GDP is still growing
at about 3.3%. Inaction by the ECB can
(and probably will) turn into action.
The US is still continuing to slowly grow, but grow it will. ISIS and Ebola are sinister, but solvable
threats. The glass is half-full. Maybe tomorrow it will be half empty. But
note that in my research, all downturns are followed by upturns. So far, that’s been running at a 100%
observation rate.
Leon
