Rebuilding the Wall of Worry

In case no one noticed, some of the “old” worries have been cleaned up. Has anyone noticed how Greece left the headlines? Those predicting disaster there have quietly moved on to a new continent.

Consumers of market horror stories need not fear! There is an inexhaustible supply of new concerns, although some of them seem smell a little like aging cheese. If you are an editor or publisher you absolutely must provide an explanation for the largest market selloff of the year. It cannot be something obvious like an over-reaction to some short-term news while the big pension fund managers are at the beach.

So let us dig into today’s “news.” None of this is new information. All of it has been the subject of past posts. Here are the items featured today as explanations and my current thoughts:

  • Worldwide growth concerns, sparked by news about Chinese stocks.
    • The Chinese stock market does not reflect the economy. No one thought so on the way up, so why believe it on the way down.
    • The actual decline in the rate of Chinese economic growth has a relatively modest effect if you run the numbers. (Check here).
  • Commodity prices are declining sharply.
    • This has often been a bogus signal in the past, most importantly in 2011. Those who took the bait then missed several years of rally while worrying about a recession.
    • Oil prices reflect excess supply, not just demand concerns. Some of this is political noise.
  • The Fed is about to raise rates.
    • Maybe. It is probably overdue given the strength in labor markets and housing.
    • It is irrelevant!! Markets typically rally for two years or so after the first Fed move. In this case the time period might even be longer, part of the sharp decline, slow recovery business cycle.
  • There are plenty of new omens, death crosses, and bearish signals.
    • Has anyone noticed that this is a permanent condition? Eventually we get a downturn and we see a victory lap from the most recent purveyors of doom.

Investment Conclusion

None of us likes to see a lower value on our monthly brokerage statement. I always warn new investors that volatility in stocks comes with the territory. Each investor must pick a risk level that might be unpleasant, but does not represent a real threat if the economic fundamentals remain sound.

That is where we are right now. I worked hard in 2011 to identify the best indicators for recession and financial risk. (Check here). I sought many suggestions for the best methods, and I reviewed them all. None of them indicate a reason for concern. They are better than the expensive, commodity-signal mistakes of 2011.

In sharp contrast, many in the media benefit from highlighting the worst case about the economy and the market – a subject for a different post. The process of finding a new list of scary stories is their fundamental business model. They have no long-term accountability for results, of course, nor does it matter to them.

Everyone knows that value investors are supposed to buy when others are fearful. It is so hard to execute this when the time comes. This is the reason for my relentless focus on fundamental economic indicators as opposed to vague, unquantifiable headlines.

More to come in this week’s WTWA.

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One comment

  • V. Uil August 21, 2015  

    What a pleasure to read a short article that is sensible and rational. A sort of investment equivalent of Kipling’s ‘If’……..If you can keep your head when all about you are losing theirs……

    Excellent stuff. Simple and clear.