Down, down, prices are down. Stock markets slashed prices around the world overnight and the turmoil reached us here in Australia this morning. The Dow Jones Industrial Average was marked down more than 300 points. The S&P went on sale with 2.28% off. Put together, it’s the biggest discount on a February stocktake sale in 32 years. The indices finished on their lows as well. That’s often a sign that there’s more discounting to come.
This is just the latest and greatest swing. Volatility has been rising steadily. The VIX (volatility index) surged 16% to its highest level since the end of 2012.
The obvious question is whether this is the beginning of something more. Are we back to 2008? Or is this just a correction in America’s epic bull market run?
That run began in March of 2009, or September of 2011 if you take into account a breather halfway. The S&P500 more than doubled since 2009. But the index hasn’t really been hitting new highs for long. It only surpassed the 2007 peak right at the end of 2012. The buy and hold investor is barely ahead, if at all adjusted for inflation.
In other words, there hasn’t really been a bull market yet. There has been a recovery within a bear market. And bear markets see many recoveries before turning down once more. Is the rally from 2009 one of those traps? Or is it a genuine breakout and the sign of a proper bull market to come?
Well, why did the rally happen? Did it happen because the economy and company prospects improved? Or did it happen because central bankers papered over the problems? Problems that are still festering.
One answer can be found in the economic data that is being blamed for the selloff overnight. Blame it on the weatherman, says the financial media. The snowstorms and freezes that hit the US recently withered the ISM factory index, which measures manufacturing activity in the US. It fell from above 56 last month to 51.3, barely above the expansion point of 50.
So what? Manufacturing is still growing. What’s the big deal? Well, the 85 economists Bloomberg polled expected a reading of 56. That’s a six-sigma miss, for those of you who paid attention in high school. For those who didn’t, it’s an error of enormous proportions. The kind you get when you pay absolutely no attention whatsoever and submit a random answer.
A surprisingly poor showing on the ISM index, combined with central bankers seemingly determined to taper, was enough to scare the wits out of shareholders. At least that’s the mainstream media’s version of events.
To be honest, we’re just a bit sceptical about this entire story. First of all the weather. It’s one of those things the stock market should be darn good at pricing in. Stocks would’ve corrected when the bad weather happened, not when the ISM tanked as a result of the weather.
Secondly, we don’t really understand why a bunch of economists can move markets enormously by getting their forecasts stupidly wrong. They consistently do so. Why the surprise? Why does anyone care in the first place?
The answer is money. Most of the stock market’s moves are based on traders instead of investors these days. And a big miss on an economic indicator is a great trading opportunity. But if the welfare of the world were based on trading, we could just get the economists to always underestimate the health of the economy. Then, each time indicators beat expectations, stock markets would go up, regardless of how bad the economy might actually be. Then we could all get rich, and economists would be useful.
–The point being that’s a fantasy world. Ironically, the real economy had recently started improving, according to a Federal Reserve report on lending. Demand for consumer and business loans rose and the banks met it with supply in the last three months. The exception was mortgages, which saw declining demand.
In the end, the fat lady has barely finished the first verse. There’s a bundle of economic data coming out this week. So we should know whether the ISM was just a statistical outlier, or if there really is a problem in the economy.
Either way, all eyes will be on Janet Yellen, the brand new Chairman of the Federal Reserve. Will she stop reducing the increase in the money supply? She could even increase the increase. Or decrease the rate of decreasing the increase.
Yes, it’s questions like these that your financial future comes down to. The way your stocks move is determined by an academic in Washington and her reading of the economic tea leaves. Your lifestyle in retirement is in her hands. Although Glenn Stevens might play a part too. The latest Reserve Bank rates decision is due today.
Having your financial future decided on by central bankers at home and abroad is not ideal, if you ask us. Central bankers will never be able to prevent crises. That’s why we’ve dug out a very old investment technique which allows you to stop worrying about stock market crashes. It’s only just become possible to execute in Australia. We just didn’t have the right kinds of assets available here until recently. Now it’s possible to build ‘ladders’ that let retirees pre-book fixed income streams. Streams that are independent of market prices.
Nobody ever believes that when we first mention it. An investment where the price doesn’t matter? Even dividend paying stocks can fall dangerously in value.
Well, some investments actually converge on a fixed price over time. And then pay out your predetermined income on a predetermined date. Which means you know what’s going to happen in your retirement, no matter how badly Janet Yellen stuffs up.
You can find out more about the ladder strategy here.
for The Daily Reckoning Australia