Another day, another market plunge. Yesterday was notably sharp, with all major indices declining more than 2% and getting worse as the day wore on. The story du jour – and it is an axiom of market declines that there must be a story that goes with it – was that the sell-off was triggered be a toxic combination of weak U.S. economic data, more concerns about Greece and whether it would default on its debts and bring down the Eurozone, and added anxiety about whether the behemoth engine of China’s economy is about to sputter and stall.So went the narrative. But as neat as this one is, you can rest assured that within weeks if not days, the markets will rebound, and all these worries about an imperiled global and domestic economy will be eclipsed by strong corporate profits, booming global markets and indications that American consumers are quietly, tentatively but definitely buying again.
The reality is that there’s no one simple story, but many. They’re often contradictory. And they are all, to some extent, true. But on any given day some combination of prevailing sentiment and high-frequency algorithmic trading programs can make one appear more true than another.
Yes, Greek debt concerns are again troubling the credit markets. When those markets hiccup, equities tend to feel the effects, as institutions raise capital and take it from the world’s most liquid source of capital: stocks. But seriously, does anyone honestly believe that Greece will not be bailed out sooner or later? Not even resentful Germans, who scorn what they see as profligate Greeks, will torpedo a Eurozone that is benefitting Germany most of all.
And yes, U.S. economic data is weak, with manufacturing showing less robust expansion in the latest surveys, with car sales sluggish, housing sales nowhere to be found, and employment at best doing a flat-line.
As for China, reports of its slowing are almost certainly overdone. Its economic activity is tenticular and omnivorous, and it will take more than a month of amorphous data to indicate serious deceleration. Want to know what’s happening in China in real time? Look at the price of iron ore – that irreplaceable input into steel. That price is going up, and the global supply from Brazil and Australia is tight, and that means China is still building more and not less. That will slow one day, but not today.
More to the point, however, none of this suddenly became apparent yesterday. It was just as true on Friday, when the markets rose a percent, and each day last week, when they went up and down. It will be just as true for the rest of the week, when the markets may fall more or rebound a bit. Traders will feast on these moves if they catch them right, but most of us should not pay them great heed.
What matters now is what lies ahead. Investors just now are increasingly bearish and skittish, which is often a sign to act to the contrary. Economies in Europe and the United States remain sluggish and adrift, but companies — global companies in particular — are thriving. Stocks in general are relatively inexpensive and for two years have generated returns few other assets have. The past few days has hardly altered that reality. But that fact won’t stop the noise, or the stories.
Pay attention to the stories. Probe them. Search them for inconsistencies as well as hidden truths. But in the end, remember that they are only stories.