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The wild market action of the past couple of weeks has plenty of folks talking to themselves. Here are a few imagined internal dialogues by different market participants, composites of dozens of conversations with professional investors and commentaries by investment strategists last week.
President Obama: "Now I know how Bill Clinton felt in the early '90s when he said, 'You mean to tell me that the success of my program and my re-election hinges on the Federal Reserve and a bunch of *%&@# bond traders?' Except today, it's the Fed and bond raters, rather than traders."
But, of course, the downgrade of the government debt by Standard & Poor's was not, in itself, the trigger for last week's upheaval or the main reason that traders were muttering to themselves. "Lookit," they're saying. "In each of the six trading sessions through Thursday, the S&P 500 had an intraday range between 5% and 6%. At last week's lows, we were down 18% in less than three weeks. This was either a slow-motion crash or an incredibly rapid correction. Nothing like this ever truly makes sense. Walt Disney (ticker: DIS) wasn't suddenly 9% less great a company at 4 p.m. Wednesday versus 4 p.m. Tuesday.
"Yet it felt unnervingly like 2008, even if the broader conditions don't neatly match up. The layering of too many unanalyzable issues, from European central bankers' fortitude to American politicians' cravenness spurred risk-reduction across the Street. For a time there, it was like we restarted the game of 'Who's trapped, and where.'
"The contrarian instinct is now flaring buy impulses. Assets in Treasury exchange-traded funds have surged relative to stock ETFs. Retail investors yanked $11 billion from traditional stock mutual funds last week. It has rarely paid to get aggressively negative on stocks with the S&P 500 Volatility Index above 40, where it spent at least part of the day Monday through Thursday, though when it has paid to sell a market with the VIX above 40, it has been in times of credit stress or systemic crisis. The high-yield market has weakened a lot, though much of that is about Treasury yields falling faster than junk yields.
"Plenty of folks who have gotten things mostly right in this cycle are tactically nervous. The Leuthold Group has said the cyclical bull market might have seen its peak. The Ned Davis Research 'cycle composite,' blending historical one-, four- and 10-year patterns, has turned negative. Michael Darda of MKM Partners, an economic optimist until earlier this year, fears that sluggish European monetary policy making is dooming the Continent to recession and contagion. Bridgewater Associates, the huge hedge-fund firm, stated in a starkly concise commentary Thursday that 'there is an uncomfortably high probability that there will be an unmanaged banking and sovereign-debt crisis in Europe.' "
The long-term strategic investor tries to talk herself off the ledge thus:
"The ferocious intraday rebound on Tuesday came just as the dividend yield on the S&P 500 ticked above that of 10-year Treasuries, as it did in the depths of the last bear market. The Fed is promising no higher rates for two years, meaning dividend stocks should retain a bid, and dividend payout ratios have lots of room to rise. It's far from clear the U.S. economy is teetering on recession; last week's jobless claims and retail sales numbers were OK. Stock valuations aren't to a level that would inure them to steep corporate profit declines, but barring that, they look pretty attractive."
FINALLY, THIS COLUMN'S ANONYMOUSLY famous mystery broker, who has had no trouble forecasting recessions and bear markets over the past 20 years, offered this on Wednesday: "I am absolutely stunned by the decline over the last week. Some of my unsophisticated clients actually sold near the top of the market last month because they thought the U.S. government would default on its debt. This is the first time they have made the right call, but I can guarantee they will wait and get back in at higher prices.…My opinion is that the stock-market collapse is much more similar to 1998 and 2010 than 2008. It is based on pure unadulterated fear."
He figures the indexes will possibly need to revisit the recent lows but sees them appreciably higher by year end. If only it were as easy for all of us to talk ourselves into his level of clarity and conviction.
E-mail: michael.santoli@barrons.com
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