Response From Capital Markets?
As we have seen in January, markets see through and quickly reject incessant cheerleading (especially in the media). With Monday's collapse, most of the fall in the stock market and the rise in the fixed-income have probably already occurred in an environment that, more than ever, adjusts so rapidly to changing economic conditions.
A possible explanation for this phenomenon is that the dominant investors today (i.e., the world's hedge funds) move more swiftly than the dominant investors of the past (i.e., bank trust departments in the 1970s and mutual funds in the 1980s and 1990s) -- and so do individual daytraders. Another possible explanation is that the Internet platform and other communication devices provide an almost instantaneous information flow.
As mentioned earlier, the economic choppiness will produce abrupt market moves to the downside and the upside, which will be difficult to navigate but ideal for the opportunistic investor. Permabulls, permabears and trend-followers will be frustrated, but those who remain market-agnostic and sell the rips and buy the dips could be rewarded.
Possible Wild Cards?
On the
negative side, more worldwide stock market weakness (reinforcing the existing economic vulnerability), tardy and indecisive policy decisions (both monetary and fiscal), another leg down in the housing market, any event that further seizes up the credit markets and a sharp rise in energy product prices could all prove to have a disruptive effect on the economy and markets.
On the
positive side, a decisive move to insure and underwrite counterparty risk by the administration would serve to stabilize the mortgage, bond and other credit markets and could produce an immediate and immensely positive impact on stocks around the world. As well, a more aggressive easing than is generally anticipated by the Federal Reserve could have a salutary impact on equities and business conditions.
Doug Kass
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