Tuesday, June 17, 2014

Stock Market: Complacency Rules? So what?

(Drivebycuriosity) - The US stock market is close to the all-time highs and the S&P 500 index gained 5% year-to-date. And the advance is very smooth; the daily up-and-down swings (volatility) have been very restrained since autumn 2012.

But the smooth advance doesn´t get get much applause. Quite the opposite, media and pundits are trying to scare the investors and are insulting them by calling them complacent. Take for instance Joshua Brown, owner of the influential blog "The Reformed Broker". This investment advisor lamented recently  that "volatility is nowhere to be found -- not in currencies, in fixed income or in equities. Complacency rules the day as investors and institutions gradually add more risk, using leverage and increasingly exotic vehicles to reach for diminishing returns in an aging bull market" (thereformedbroker). The online service MSN claims that "market pundits are beginning to freak out about the shortage of people freaking out" (msn)  and the commentator Mohamed El-Erian, one of the notorious worrywarts, ranted that "stability ends up breeding instability . . . At some point, financial stability becomes too much of a good thing, because it encourages excessive and ultimately irresponsible risk taking by individuals and institutions. In the process, the economic system and, therefore, collective interest are threatened".(msn) Pundits call this situation "Minsky Moment", after the late economist Hyman Minski (nytimes).

I think it is very arrogant to accuse investors being complacent when they stay calm. The online dictionary Merriam-Webster defines complacency  as "an instance of usually unaware or uninformed self-satisfaction". I believe that there are many reasons that even very good aware and informed investors are calm.

The global economy is moving in a moderate upwards trend. The data (job market, retail sales, manufacturing & services) proof the US economy is getting stronger, Europe is recovering - albeit very slowly - and China is defending a growth rate of 7% plus (driveby). Interest rates are extremely low, inflation is contained and the majority is underinvested (very high in cash).  There are no signs of a general "excessive and ultimately irresponsible risk taking".

Investors with a long time horizon (10 years and more) have another reason to be calm. The recent all-time-highs are the proof that every setback, correction and crash on the stock market has been offset. In the long run stocks have been rising on average around 7% annually, if you reinvested dividends you got an annually return of 9%. There was no 10 years period on the stock market with a negative return.

The real reason why pundits are freaking out is that the smoothness makes them redundant. Who needs a pundit when almost every paper on the stock market is climbing smoothly? Who needs their sophisticated and experienced advice when indices like S&P 500 reach all-time highs? Why paying a pundit when Joe Sixpack, who invests in a simple S&P 500 ETF, gets richer and richer almost every day?

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