Yesterday’s collapse in US equities (and overnight rout in Asia) has many questioning their favorite TV guru’s perspective that this is a “healthy” dip to be bought, just like all the others… Former fund manager Richard Breslow thinks otherwise, and explains why this market wreck is different…
I’ve been struggling all week with the question of why this extraordinary volatility and downdraft in equity prices just isn’t haunting me. After all, previous episodes, like the beginning of 2016, were certainly unnerving. And as it is Friday I was hoping for some closure on this issue. And then it came to me. Being a visual person, I should look to my charts for some inspiration. And that is indeed where I’ve found solace.
One of my all-time favorite charts and a great barometer of the really big-picture state of the market is a monthly chart of the S&P 500 with the 21-month moving average drawn on top of it. You can go back decades and with little difficulty list what unhappiness was occurring when the index dipped below this rather remarkable line.
But my secret cheat-sheet has another characteristic that has been utterly violated since the last U.S. presidential election. And now there is a price to be paid for it. Market pricing has tended to opt to stay fairly close to this moving average. Periods when they stray apart generally occur when something has panicked investors, in either direction. And when things settle down price levels tend to search out the comfort of this guiding light.
Since the end of 2016, the index has left the moving average in the dust.
Too far, too fast looks like an understatement when mapping out this period. And makes it quite clear why we have received gentle, and then not so subtle, prods about irrational exuberance.
Even with this big fall, the S&P remains at a highly unusual distance from where history has told us it should be at this juncture. If you look at the chart, this price action suggests that it is payback for gains that were borrowed, not earned.
This is why I’m left somewhat cold to the notion that this has sown pain and is destroying wealth. It is what it is and appears appropriate. I don’t even believe this is somehow the bond market’s fault. Unless you also want to blame blind risk-parity strategies for the amazing run-up in prices that had Hampton’s mansions flying off the shelf.
Obviously, this line will continue to move up. That’s just simple math. But even so, and here comes the bad news if this week has already upset you, the market could continue to be on shaky ground and have done absolutely nothing wrong. You could reasonably, and simultaneously, say, the market’s going to get hit and I’m bullish.
But if you believe that the fundamental global growth story hasn’t suddenly changed and want to speculate (no pun intended) on where long-term investors might show some renewed interest, there’s a line you might want to keep an eye on.