This column was originally published on RealMoney on May 7 at 2:57 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
It has been two months since the market bottomed out in its reaction to a bout of Chinese financial flu. The power move since then has not only regained the earlier high but also recovered to the prior trend line: The broad market is where it might have been had the Chinese contagion not happened and the then-existing trend maintained.
No real harm done: Oops, excuse me. Did I spill your drink? Let me get you another.
A recovery this sprightly has led to the term "parabolic" being loose in the land. Parabolic in the context of the stock market is often used as a pejorative; the implication is that what goes up on a path that looks like the left side of the big hat Hoss used to wear on "Ponderosa" episodes is destined to come down on the right side. (What? You don't remember? Or your cable provider doesn't offer a channel of old television series?)
Good times in the market always bring out those who remind us we don't deserve it. Bad times, in contrast, tend to give the parabola wielders great satisfaction that all is right with the world.
Strangely, it does appear that much, if certainly not all, is right with the world. The
' chief economics commentator, Martin Wolf, took the time last week to extract the juice from the International Monetary Fund's most recent World Economic Outlook.
He noted booming growth: "In 2006, for example, the world economy expanded by 5.4%. The advanced economies grew by 3.1%, while emerging and developing economies grew by an astonishing 7.9%," as well as "the success in controlling inflation, notwithstanding the strength of commodity prices, particularly oil."
He also notes that the IMF expects the global economy "to remain on track for robust growth in 2007 and 2008" and comments that this is "as close to euphoria as one is likely to get from economists."
The Inevitable Surprise
Then comes the obligatory party pooping; in this case, "nobody ever expects shocks." He lists those of his adult lifetime: oil shocks in the 1970s, Paul Volcker's inflation- and economy-crushing determination in the 1980s, the Mexican crises of 1982 and 1994-'95, the crash of '87, the Asian and Russian meltdowns of 1997 and 1998 and, of course, Sept. 11, 2001. These may not in every case have been unknown unknowns, but they were at least "ignored unknowns" that came back to bite us. "Surprises," he asserts, "are inevitable. Some are likely to be desperately unpleasant, too."
I can't disagree with that, but I will make note of some of the "surprises" that he omits. One might be the success of the Volcker-era campaign against inflation; imagine if that one had flopped. Then there is the disappearance, with a barely a whimper and not the slightest bang felt here, of the Soviet Union.
How about that Energizer bunny of a driver of technical progress, Moore's Law; who knew it would keep on going and going? I believe the Internet was just some time-waster of an obscure DARPA project -- unless Al Gore really did invent it. China. India. Go back to the 1970s, '80s or '90s and make an inventory of all the seers who foresaw the emergence of these economic goliaths.
Not all surprises are desperately unpleasant. I don't know much about medicine or medical technology, but if I ever need a tune-up, I'd rather get the 2007 treatment than what might have been available in the early days of the lives of Mr. Wolf and me. (I am still going bald, however; there is work yet to be done.)
I don't mean to be picking on Wolf here, because I'm a fan; regular reading of his column shows him to be an erudite man. It's just that I'm sensitive to the best being permitted to be the enemy of the good. That sort of attitude is among my personality flaws, but I'm in recovery. If you're the sort of person who is exhausted on a Sunday evening after a heroic effort at weekend chores but grumpy because you didn't get everything on your list done, you know what I mean.
The Right Stuff
There is good reason to ask, when times are good, just what it is that might go wrong. Something almost surely will. Why is it so much less common, though, to ask in good times, or bad, what might go right? Markets, after all, are about risk and opportunity. If risk is your sole focus, you might still have the investment strategy that seemed to make sense when Wolf was a pup, but your canned goods and gold coins might provide cold comfort today.
Let's see: The
stood at 79 on May 4, 1970, before all the bad stuff noted above came to pass. It's at 1505 now. That's an 8.3% annual return, compounded, not counting dividends and buybacks, but desperately unpleasant surprises are fully taken into account.
Maybe it is good practice to monitor the upside risks, as well as those to the downside.
The ebb and flow of optimism, the cyclicality -- it was ever thus. When you're encrusted with almost 40 years of experience, the hurdles begin to look familiar, even if they have freshly painted labels on them. We each trip on our share.
Another constant seems to be the rediscovery of David Ricardo and the gains from trade. The IMF World Economic Outlook, as abstracted by Martin Wolf last week (and me, forthright disclosure, in this space
in early and
mid-April), gives much of the credit for disinflation and a spreading boom, as well as the rapid growth in the volume of world trade and investment, to globalization.
The power of this global fusion began to become widely apparent only in the past decade so. We are all still neophytes about its full nature, promises and exposures. But every year, the IMF makes note of it, and every once in a while, a columnist or strategist points it out as if it were new. It is likely to be new for at least another generation; it is a desperately pleasant upside surprise that will be evergreen for many market cycles to come.
Jim Griffin is economic consultant and portfolio adviser to ING Investment Management and its Hartford-based unit, ING Aeltus, which manages institutional investment accounts and acts as adviser to the ING Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.