Weekend Reading 8/21/2015
Chickity China the Chinese market is the flavor of the month. During the first half of the summer, olives, feta cheese and gyros dominated the headlines. Now, as worries about an economic slowdown in China creep into the markets, the tail end of summer might be all about Kung Pao chicken, pork fried rice and spare ribs.
Bad jokes aside, earlier this week a friend asked me what was with all the “global fears” market stories. This isn’t a surprising question considering every couple of months you can count on headlines that imply we could be on the brink of another financial crisis. Stories like that really grab people’s attention.
Now admittedly, I’m occasionally a bit cynical. I’m sure the news outlets writing these headlines aren’t entirely motivated by page views. Let’s be honest though, a headline that reads Markets Ride Wave of Global Meltdown Fears is probably going to get a few more clicks than one that says Markets Pullback 4.5% After Six Year 220% Rally.
And that’s where we stand today. At the time of this writing, the S&P 500 is trading 4.6% below the all-time high it set a few months ago. Why did the market pull back this week? I don’t know. I can tell you what the headlines say (China, oil, currencies) but all I really know is that there was more selling than buying. And that’s normal. Markets don’t go in one direction. They go up, they go down. Since the 2009 financial crisis, we’ve had the good fortune of witnessing an incredible bull market. It has ascended with very few pauses. Historically, that isn’t normal. Many of us are now programmed to think that if stocks aren’t going up, something is very wrong. In his Behavioral Macro blog this week, hedge fund manager Mark Dow referred to this theme as “disaster myopia”, which is a great example of recency bias:
We are still living in the long shadow of the global financial crisis. Worst case scenario, daily. This ease of recall induces us to over forecast tail events – even if Macrogreeddon is 0 for 500 by now. Erring on the side of optimism is still the money trade.
So is a global financial meltdown just around the corner? If you’re asking for my opinion, I’d say the chance of a meltdown is very, very, very slim. But, I probably would have said the same thing in late 2007. I learned long ago that opinions don’t matter to Mr. Market. An opinion isn’t anything special. Everybody has one. They are great for discussion, brain exercises and for egos. Once you acknowledge that we live in an irrational and unpredictable world, ignoring the headlines and relying on a nonopinionated process to make investment decisions becomes the only rational choice.
Have a good weekend. Ciao!