Slipping on Greece

Posted on May 25, 2010

Filed Under The Economic Scene

The recent sharp movements, mostly down, of the stock market have sent shivers through the investment community. They worry that another full-blown, nasty bear market is upon us. After all, it’s hard to ignore the headlines about riots in Greece and the general financial turmoil in all of Europe, along with uncertainty over the horrendous oil spill in the Gulf of Mexico

So yes, this could be a long hot summer. But let’s keep four key factors in mind.

First, the global economy went into this latest period of market volatility in much better shape than in early 2009. The strength of the economic recovery during the past year, particularly in the United States and Asia, has continually surprised on the upside. While that momentum will undoubtedly slow, it does not automatically mean a reversal back to global doom.

Second, while the stock market correction so far has been abrupt and painful, it actually has been fairly typical of what might have been expected to happen given historical patterns. It’s been about 14 months since the current bull market began on March 9, 2009, which is in the neighborhood of the average length of time that has passed from the start of prior bull markets to a first correction (17 months, on average).

Third, the S&P 500 Index gained 84% from its low on March 9, 2009 to its peak on April 23, 2010. Historically, the first correction in a new bull market has come after average gains of 57%, so again, it can be stated quite reasonably that the market was long overdue for a breather.

And fourth, as Barron’s reported last week (5-17-10) in its “Stronger Than Ever” cover story, “Corporate America is sitting on piles of cash, ready to be spent on things like share repurchases and acquisitions.” Meaning US firms are in an enviable position to withstand gloomy news from abroad.

Again, the market is decidedly weak right now. But there are good reasons to think this downturn will be nothing like what we saw in 2008.

And for Weber Asset Management clients, be assured that we, for some time now, have greatly reduced our exposure to foreign stock markets in client accounts.

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COMMENTS

  • Doug Barnshaw

    Sounds good, but what about all the home owner and commercial restate that is waiting to be dumped on the market?

  • Ken Weber

    Yes, there are many unsettling uncertainties out there, including those that you mention. But they are already, to a large degree, factored into current stock prices. The big money managers, who basically rule the market, are well aware of the lurking real estate problems. I could certainly make a strong case for trouble ahead, but in this blog post I simply wanted to present a few lesser-known counter-arguments to the bearish scenario.

  • John Boon

    I am wondering if we are entering a brave new world of unknown mega-risks. Those of us in normal life tend to think we’re well-informed but clearly have no clue when a company like BP decides to take on unimaginable risk for bigger profits. Other companies know the risk but have to follow suit or lose market share – an “irrational” decision forced by a “rational” one. How many similar disasters are waiting to happen in the computer-controlled, flash-trading market of today? Does anyone really understand risk under these circumstances?

  • Ken Salzman

    In line with John Boon’s comments, I am remarkably unimpressed with the economic geniuses who have created brilliant models for fast returns on the markets. One of the reassuring aspects of Jack Bower’s modeling is that he does not calculate for the fast gain or quick trade. The “big money managers, who basically rule the market”, as Ken Weber calls them, appear equally unimpressive at the task, most especially if their response to Greece and other “panicky” events is to, well, panic. It has always seemed that the convulsions of the market have been the result of such panic behavior, and that long term calm and patience would have averted them. Such, however, does not appear to come from those who rule. The rest of us just have to go along for the ride.