With markets selling off again in the face of dire economic data, it is
worth stepping back and putting things in perspective. Although today's
UK unemployment data was dire and sales projections from Best Buy below
consensus, markets haven't capitulated. Despite the economic outlook
arguably looking bleaker than it did just two weeks ago, markets are
holding above the October lows. The optimistic interpretation of this
scenario is that the bad news is starting to be priced in by the stock
market. As markets are forward looking by at least 6 months, markets
could be discounting the slowdown that virtually everyone is predicting
and are looking for what happens after that.
The pessimistic interpretation of the current scenario is that markets
are as over optimistic now as they were a couple of months ago. The
default reaction to any impending disaster is in most cases denial then
panic. The pessimist would argue that investors are still too optimistic
about companies future growth prospects and so further falls are likely.
The reality is that markets are flipping from optimism to pessimism
almost by the hour and markets remain entrenched in a choppy mess. After
repeated failed rallies over the last few weeks, the bulls would be
forgiven for giving up the ghost.
There have been many comparisons between current market action and the
great depression of the 1930s and in many ways these comparisons are
valid. The last time markets were as choppy as they are today was indeed
the 1930s. The world is a very different place to how it was 70-80 years
ago, but the current extremes were seeing point back to this period as
being a strong likeness. It is interesting to note that the stock market
only recovered from is decade long malaise once it switched from chop
mode to trending mode. If a long period of chop is the worst we
experience over the next few months, even years, although frustrating,
there may be worse things that could happen. Ironically, a smooth
decline which bottoms out to form a smooth rally may be the real
harbinger of a recovery.
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