Saturday, August 22, 2015

Stock Market: Season Of The Fear Mongers

(Drivebycuriosity) - It is the season of the fear mongers again. Last week the US stock market (S&P 500) plunged 5.5% and lost 4% year-to-date. The steep slide started on Thursday and accelerated on Friday.

China is the main culprit for the meltdown. The media are wailing about China´s stock market crash, the recent devaluation - the Yuan dropped meager 4% - and the slowing economic growth. The experts also complain that commodity exporting emerging countries like Brazil are suffering from the dropping prices for oil & other commodities.

Friday´s selling panic might have been ignited by another drop of China`s purchasing managers’ index (PMI) for manufacturing, which indicates a shrinking manufacturing industry. The index has been weak for months and dropped now on the lowest level since 2009. But in 2009 China`s economy grew 8.9% - exceeding the target - in spite of the dismal manufacturing index (marketwatch). So what? And the media ignore other China indicators - like the accelerating service sector, solid retail sales and industrial production - which all signal a steady economy (economist).

The fear mongers also downplay the still solid US economy and the - albeit slow - recovery in Europe. Yesterday we also learned that Europe´s manufacturing index grew steady and the growth of the service sector even accelerated - but this didn´t make many headlines of course (businessinsider  wsj) !

The alarmists neglect the strong tailwinds from cheaper oil  & other commodities for the US, Europe, China, India and other commodity importers as well. Companies have lower costs and consumers more money to spend. The US gasoline prices, which recently spiked because some refineries shut down, are falling again.

I think that last week`s meltdown is just another tribute to the pessimistic sentiment. Many hedge funds have been betting on falling stock prices for months. Short sellers borrowed stocks and sold them immediately in the hope to buy them back cheaper (driveby). Fear mongering, spreading pessimistic rumors, overblowing disappointing news and dismissing positive facts works in their interest. The media, which live from bad & shocking reports (man bites dog), compliantly spreads the scare mongering. Everyday you can read some crash & recession predictions.

On Friday we witnessed another evidence for the typical herding behavior of the hedge funds (and those who follow them). Those speculators buy and sell the same stocks, at the same time, and track each other's investment strategies. So the sliding stock prices provoked more sales which accelerated the slide.

Since start of this bull markets in 2009 we had similar situations, especially in 2011 and 2012, which are forgotten today (stock-market  bears). I assume that this panic will be short lived again, because the pessimism is not backed by the fundamentals,  the sellers will come back and the bull market will resume.

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