The markets are falling, not panicking
Allan Sloan says that today is “scarier than 2008-09″ — and looking at the markets, he doesn’t seem far off. Yes, stocks are still much higher than they were at the height of the crisis, but relative to earnings the improvement isn’t all that impressive. Meanwhile the 10-year Treasury hit a new all-time low yield of 1.97% today, inflation figures notwithstanding, and gold too is hitting new highs above $1,825 per ounce.
To be honest, though, I’m not seeing fear or panic right here. For one thing, we’re in the middle of August — the time of year when traders and institutional investors go on vacation, volumes tend to dry up, and market moves can get magnified for no good reason. Today stocks fell as much as 5% and the VIX broke above 40 — moves which are indeed reminiscent of what was happening in those panicked days of 2008-9. But having experienced those days and come out the other side, I feel that the investing public as a whole has been toughened up a bit, inured to volatility in a way they weren’t back then. Plus, of course, they’re much richer, on a mark-to-market basis, than they were when the S&P 500 was below 700.
What I’m not seeing here is deep-seated existential fear — the idea that certain companies might well wind up seeing their stocks go all the way to zero, and then defaulting on their debts. During the crisis, we had the worst possible flavor of that fear — that it was banks which were insolvent. Now, by contrast, bank stocks are low, but the famous TED spread, for instance — one of the best indicators of the degree of faith that financial institutions have in each other — is still less than 30 basis points. It spiked to more than 400bp at the height of the crisis.
If we were genuinely in a period of panic and turmoil, we wouldn’t see multi-billion-dollar deals being done for companies like Morotola and Autonomy; we certainly wouldn’t be seeing extreme equity capital markets deals being mooted like the idea that Manchester United might list its shares on the Singapore stock exchange. The markets are clearly finding it difficult, this August, to determine what the right and proper price is for various financial assets. But that’s not panic. In fact, it might just be a perfectly rational response to an increasingly uncertain world.