A combination of factors synchronized today to cause the price of risk assets to lock-up and move downward. First, was the wording of the Fed’s announcement yesterday. Within the statement was a bearish comment about prolonged economic difficulties. Next, China’s version of the PMI index came in below expectations — spurring fears of a slowdown in Chinese growth. Third, was the realization the Europe’s recent stress tests didn’t fare all that well. As a result, European officials are speeding up their plans to recapitalize 16 Euro-zone banks.
This combination pushed the U.S. Dollar up, causing dollar-based commodities to fall. Fears of slower economic growth also weighed on commodities — creating something of a “double-whammy” for that asset class. At the same time, stocks around the world were sold-off as risk appetite dried up. The beneficiary of this? The U.S. Treasury. The 10-year rallied, dropping the yield to 1.72%. If you wish to loan the government money for 30 years, they will reward you with a yield of 2.8%.
After being off nearly 4% intra-day, the S&P 500 ended the day down 3.2%. Not a particularly good day… but one in need of some perspective.
The week of September 12 through September 16 was a strong one for the S&P. Over those 5 days, the index gained about 6%. This week, on the other hand, was not quite so pleasant. But, taken as a whole, the S&P 500 is roughly sitting where it sat on September 12. These gut-wrenching days (or the euphoric ones, for that matter) can capture emotions and magnify reactions. We succumb to those emotions at our own peril.
That’s not to imply that changing macro factors shouldn’t influence decisions.
I’d simply make the argument that nothing has changed.
A few weeks ago we blogged about the real recession (which we are in) versus the technical recession (which hasn’t yet been confirmed). The Fed’s statement didn’t really add anything new to that thought. It is widely believed that Greece will default on its debt (that’s why their 1-year bond is paying 110% interest). No surprise there. Today’s announcement that 16 banks need recapitalized didn’t come as a shock, either. I know precious few (or perhaps nobody) in my industry that placed any confidence in the European banking system or the stress tests. That scene is very reminiscent of Bank of America shouting how they don’t need any more capital while they are actively overpaying for capital. And China… could they have telegraphed any more loudly that they were putting on the brakes? Is anybody really surprised?
I think what we witnessed today was a convulsion in risk assets not unlike the convulsions we witnessed in August. The market’s are jittery. Managers want to get back in black for the year so no morsel of good news can go un-bought. Conversely, no manager wants to see 2008 redux, so no morsel of bad news goes un-sold. Damn the fundamentals. Just beat the benchmark.
Maybe the best thing to do is to maintain a low net exposure. That’s all my broken record keeps playing!