And the folks at Barron’s and CNBC are delighted. Why? Because it should stimulate readership and viewership of their organizational output … very good for advertising sales. In the financial media nothing sells quite as well as bad news. In the general media the same holds true, as they were all trumpeting the fact that on Friday the Dow Jones Industrial Average saw its worse day in over two years, down 665.75 points (2.54%).
This is just what the media needed after what was a snoozer 7.8% rise in the Dow in the first month of the new year. It was so slow and orderly, yet efficient, with zero volatility. That ended (for a while) last week.
“Risk Roars Back” (you need a subscription to view) was the cover title in this weeks Barron’s Magazine and it was the title of this weeks Up and Down Wall Street column from Randall Forsyth.
“Party like it’s 1987”
Forsyth shamelessly brings his readers back to a catastrophic day in the fall of 1987 … the Dow down 22% in one day! (versus a 2.54% drop Friday)
“It doesn’t have the ring of Prince’s fin de siècle anthem, but there’s nothing like a 600-point-plus plunge in the Dow Jones Industrial Average, such as Friday’s, to bring back memories of Black Monday, Oct. 19, 1987, in which the blue chips lost 508 points.”
Ridiculous! Most people reading Barrons’s today weren’t even in the market 30 years ago. But, there’s nothing like a cataclysmic reference to stir the emotions of the newbies.
Later in the article Forsyth points out the similarities, as well as the dissimilarities, between then and now. The main comparable fact was that the Fed had started to raise interests rates. He also points out that then the yield on the ten-year US Treasury note was over 10%, whereas the current yield on the close last Friday, February 2, was at 2.84% (16 basis points lower than its post-recovery peak of January 2014 — 3.01%). I might point out that when the Dow Jones peaked in 1987 the index was up a whopping 170% from its breakout to new all-time highs in 1982 (the beginning of that secular bull market). Currently the more-widely-watched S&P 500 is up 78% since its breakout in 2013 (a similar 5-year period).
That was then. This is now.
In 1987 we were coming out of a period of years of abnormally high inflation and, consequently, abnormally high interest rates. Today is the mirror image … abnormally low inflation (in large part due to globalization) and abnormally low interest rates (due to central bank efforts to stimulate and keep their economies out of recession, or worse, depression). This tactic appears to have worked. The logical consequences of these measures would be increasing economic activity world-wide (a plus), increasing asset valuations (a plus if you have assets), an increasing rate of inflation (a plus as it give corporations pricing power; a minus if it gets out of control) and, finally, higher interest rates (a sign of good things happening). This is a great outcome that makes the current wave of media-generated fear about higher interest rates totally unwarranted.
Pleading For A Negative Comment
The attached link to a video interview (Legendary investor, Bill Miller, on Dow’s 500 sell-off) of portfolio manager par excellence, Bill Miller and investment legend, Charles Ellis, is a quintessencial example of a talking head, CNBC’s Brian Sullivan, trying to shape the interview to fit his own negative narrative. Try as he may, Sullivan could not get Miller to budge on his feeling that Friday’s action was absolutely normal … not a pre-cursor of something more onerous. Ellis, when quarried in the same manor, said that we really should be worried about a retirement crisis (not the daily gyrations of the market), as most people have no clue as to how much money it will take them to retire and that they are nowhere near saving the requisite amount. This short clip is worth your attention if you are the least bit skittish about the market. I feel sorry for Sullivan as his performance is very embarrassing.
Sure, the market is ripe for a correction
Obviously, a correction would be normal. That is Miller’s message. And, if the market continued sharply lower, it would still be normal. Nonetheless, the media will continue to dwell on the decline with headlines like this from CNBC, “A rare phenomenon is gripping the market and one fund manager at a $296B firm sees more pain” . Bad news sells.
So, maybe, risk has roared back. My take is that risk has never left us. Also, Charley Ellis’ admonition about a retirement crisis is a real risk … the risk of people not taking enough risks to build wealth for their retirement. Part and parcel of that risk aversion is human nature and a media that knows ‘bad news sells.’
What do you think?
P.S. Risk roared back with a vengeance today, Monday 2/5 … the Dow down 4.61% (down at one point nearly 6%), the Vix at 33.52 (up 93.75% on the day) and, what many have been so worried about, interest rates, which were down (the 10-yr. Tsy. closing at a 2.73 % yield, down nearly 13 basis points. Welcome to the long-awaited correction (I think?).
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