Markets are going off a cliff, but economies and companies are still prospering.
FROM POLITICO | AUGUST 24, 2015
There is only one question to ask on this manic Monday: Is the global market turmoil that has now spread to Wall Street a summer squall—a painful but ultimately transitory surge in volatility—or is it the first crack in a shaky global edifice that is about to crumble?
Let us, first, give the doom-sayers their due. The argument that we should be very, very worried about what lies ahead is serious and deserves serious attention. The Dow Jones index has suffered its steepest losses since 2008. On Thursday and Friday alone, U.S. listed stocks lost more than $1 trillion; in the first minutes of trading on Monday morning, they lost even more than that. Global markets have been equally dismal. In the past month, another $1 trillion has flowed out of emerging markets, while China’s indices have seen double-digit sell-offs. Shares on the Shanghai exchange, not a real proxy for the China economy but real nonetheless, lost nearly 9 percent on Sunday night. German and French shares also lost 7 percent last week, and another 4 percent on Monday.
For some time, pundits and professionals in marketland have been on edge, unsure about when the Federal Reserve might raise short-term interest rates and uncertain about whether the general global economic landscape is conducive to further increase in corporate profits and stock prices. As a result, the sudden sell-off combined with the continued collapse of oil prices and the still remarkably low yield on bonds has brought all sorts of pessimists once again out of the shadows and onto center stage.
And yet. And yet.
The world has muddled through much better than the grim reapers of the market world have thought possible over the past years, and today, the global situation is unarguably better than at any point in the past few years. The United States has managed steady growth, steady improvement of employment and even some signs of modest wage growth (for instance, Walmart raising wages along with several cities passing minimum wage laws). Europe not only hasn’t imploded, but aside from Greece is showing many signs of a nascent recovery, albeit with untenably high unemployment in countries such as Italy and Spain.
China is a wildcard, but is still growing at a robust pace and the composition of that growth is likely much higher quality than in the past, with more coming from a real middle class and domestic activity rather than export markets and government spending. On Monday morning, the CEO of Apple, Tim Cook, made a bold statement about the strength of Apple’s business in China as a countersignal to the widespread belief that the Chinese economy is on the verge of implosion. And those emerging market economies suffering from sagging oil and commodity prices used their flush years to invest in education and infrastructure and are for the most part ruled by democratic governments accountable for continued reform, even if those governments are facing a glare of questions about past errors (such as the massive corruption scandals surrounding Dilma Roussef in Brazil).
And then there is the fact that larger companies remain immensely profitable and continue to grow well above the rate of most national economies. While that slowed in recent months largely because of the drag of energy companies, it remains true that companies are – for better or worse – the most dynamic elements in the global economy. If there is any marginal rationality to the investing world, it makes sense that money would flow to those and that the future of those investments is at least not bleak.
This sell-off may not be over, and it would hardly be a surprise if there is further downside. But what matters for the economic future is whether this portends all sorts of other pain as well as a long period of low or negative returns.
Ever since 2008 and the global financial crisis, professionals in the financial world have been prone to bouts of hyperbole and overreaction just as extreme as the dramatic bounceback of the Dow Monday morning after its 1,000-point opening plunge. To some degree, that was probably always the case. Money, sex and religion (along with politics) tend to bring out the irrational, and sharp market movements have rarely been greeted with anything resembling sangfroid. The surge in selling in global markets the past week has brought those voices to the fore.
They have arguments to make that this is merely the first crack, the tremor before the big one. One analyst wrote a long and thoughtful piece with the headline of “Dow 5,000? Yes it could happen.” Such a decline would be 70 percent and assuredly be part of a wider global sell-off that would obliterate tens of trillions of dollars of paper wealth. That would also be a steeper drop off than what happened in late 2008 into March of 2009. But the ingredients are there: Valuations are higher than 20 th century norms; emerging markets that have depended on a hungry China consuming raw materials are in a deep bind as that appetite diminishes and prices collapse; Europe and Japan are caught in a deflationary growth trap with shrinking populations and expanding safety net costs; China may be trying to transition from a manufacturing economy to a consumer economy but for now the only thing clear is that the export engine has stalled and nothing has yet replaced it fully; and the United States is eking out low level growth based on fewer workers, technology and accommodative central banks.
But this bleak picture is also not the only picture. Cup half empty or cup half full will largely determine how you interpret what is an admittedly opaque global picture. Opacity does not play well on TV or in the world of financial punditry. It’s just too … opaque. But the very uncertainty of the global system augurs against such clear warnings of major trouble.
The bottom line is that for the past few years, financial markets have outperformed real-world economies. This year, many national economies are doing well while financial markets are flat to down. The universe can certainly handle such a year, as should investors. The noisome negatively that pervades financial commentary should not obscure the fact that net-net, we have been in a rather stable period in much of the developed world and indeed much of the world overall outside of notable and egregious exceptions such as Syria and Yemen and Venezuela.
Financial markets are not an exact proxy of those trends, but nor are they completely detached. It may be painful for a while, but that does not mean we should suddenly heed the Cassandras in our midst. The world has been growing more stable and more affluent, random market declines and occasional acts of violence notwithstanding. That is the most powerful trend in the world today, and until it is dented beyond recognition, it is likely to continue.