The Only Thing to Fear is Someone Else’s Fear
We recently got an auto reply from a contact who is out on their honeymoon until mid next week. If they are on a classic honey, then they might find themselves blissfully disconnected. I remember my own such vacation where internet connectivity was hardly available and my desire to check in even less. It’s amazing both how easy it can be and how much can happen when away. My trip occurred when Bin Laden’s raid took place. Big news, but I had no idea until later, during the strange catching-up period where it isn’t just work but life events. The time is filled with a strange sense of anticipation, hoping that you didn’t really miss something too big. That sense of confusion and wondering (is everything really all right?) is what those away during this past week will think upon returning.
Some news is bigger than others, and luckily for those away now, this past week’s news is major but not in and of itself life changing (no wars). It is, though, chock full of uncertainty and unfortunately potential economic impact. For a quick understanding of what happened, just look at this graph of the major US markets on August 8, 2011.
Dips happen. The markets go up and down all the time, but at a certain point, the dip becomes big enough for people to take notice and get worried. Monday this week reminded me of another big dip. I found the following in my saved images. It’s an intra-day picture from October 6, 2008, right as the financial crisis was heating up. It was meaningful too because it was the first time the Dow had dropped below 10,000 since the end of 2004 or perhaps the beginning of 2005. In fact, the Dow had topped 14,000 only one year before in October 2007.
Luckily, the Dow didn’t actually close down that many points that day.
It was a few weeks earlier on September 15 that news of Lehman Brothers collapse came out. That was really the signal of a much bigger financial crisis than many believed might occur. That was when the Dow was still hovering closer to 12,000.
The day after the largest point spread fall since 1987, the markets picked up where they left off. They didn’t have as large of a single day spread, but the end result was worse.
Amazingly, the Dow had lost almost 3000 points between the beginning of September and the the beginning of October. In typical market fashion, there were some large single day upticks, but the overall trend continued even further down than would have seemed possible, bottoming out in early March at just north of 6600 points. That’s a drop of north of 50% from its October 2007 peak. Had you the foresight to buy into the market anywhere near its bottom, until just this past week, you would have seen an astounding return.
Let’s assume you got close but not perfect. You still would have doubled your money in the past two years.
Returning to this week, the Dow fell 634 points on Monday. Had you bought at the very end of Monday, you would have seen your money gain 4% just like that. The problem, though, is if you didn’t sell on Tuesday, because the indices took another nose dive yesterday, Wednesday August 10th.
Looking at the above, though, you almost can’t tell what happened Wednesday, because Tuesday was so volatile. The markets spent the majority of the day down before rallying big time near close. Wednesday on the other hand opened off big but seemed as though it might recoup its losses before all positive momentum was taken away.
The markets are nuts, and like many major dips, this one came after many days of downward activity. Towards the end of July, the Dow had climbed to just north of 12,500, up almost 25% from this time last year and almost 10% since the beginning of this year. Those gains started to give back some around July 22. It wasn’t until August 6 that the wheels came off.
Up until this point, we’ve seen lots of drops and looked at snapshots of different time periods, highlighting a few specific instances in the past that resembled the markets of today. But we haven’t actually mentioned what triggered this week’s massive sell-off. It came from a momentous event – the rating agency Standard & Poors downgrading the security of American debt. It is basically a warning to those who buy American debt that it isn’t as safe or risk free as it always has been historically. As reported, the downgrade “is freighted with symbolic significance but carries few clear financial implications.” The ratings agency said in a statement, “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” and that, “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances.” .
Legendary investor Warren Buffett said it didn’t make sense and added, “"We just filed our 10Q and we have $47 billion in cash and cash equivalents. Well over $40 billion of it is in short end T-bills. (Tonight’s S&P downgrade) doesn’t tempt me to sell. We’ll stay right there." It’s the Treasury bills (T-Bills) that are notes of repayment by the government. When asked this past Friday (when news of the downgrade leaked) if he was worried about the markets on Monday, Buffett said no. Unfortunately for us, as we saw the rest of the investment world was not as rational and we find ourselves yet again wondering where on the market up and downs we are.
Like anyone, we wish we knew enough about consumer psychology to guess where this one goes. Perhaps that is what makes it tough. We just can’t tell if it’s fear or rationality driving people’s emotions. Interestingly, technology stocks have fared well. The market as a whole is only up 8% from July of last year (even after this week’s mess). Technology stocks are up 20%+. Apple, which for this moment, is the most valuable public company in the world, is up more than 50%. Does that mean tech is overvalued and there will be a bubble, or does it indicate other stocks are really undervalued? Since early 2009 the company has only gone up – trading at more than four times what it was then, and it’s up 2x if we look at the market peak in 2007 through today. Gold might not be able to top that.
The US has definitely learned a lot in the past two years – consumers seem better aware of their own debt. The country seems to want to reduce its debt. Lending is happening but with more controls, and many companies are doing fantastically well. We really shouldn’t have anything to worry about, but it is so much easier said than done, and more than anything, it’s amazing to see just how fragile the entire financial ecosystem is. At least in 2008 we had a great reason to worry. This period of uncertainty is arguably scarier because it’s all emotion and speculation.
