Euripides and Sophocles couldn’t have asked for better material for a financial markets melodrama. Little wonder, therefore, that yesterday turned into a day of carnage on Wall Street, from the moment that US stocks prepared to open for trading early in the morning. There may be more to come.
According to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, with only an hour to go before the bell rang to signal the start of trading on the floor of the NYSE, the 1.03% decline in the price of futures contracts on the Standard & Poor’s 500 stock index – the market bellwether – was the biggest since the autumn of 2008, in the midst of the financial crisis.
By the time the day of market horror finally ended, trading had at least resumed on the NYSE, with exchange officials quickly quashing speculation of a cyber-attack. But if you’re looking at your 401k or other investment account statements in the coming days, you may want to brace yourself for a shock: the S&P 500 index tumbled 1.65% to 2,046.91, while the Dow Jones Industrial Average fell 1.46% to 17,517.76. Most traders reported seeing a sea of red on their screens, and each of the 10 sectors in the S&P 500, from financial stocks and retailers to mining companies, participated in the selloff.
If you’re unnerved by what you’ve already witnessed, you may want to prepare yourself for another go on the Dow Jones Terror Ride. “It’s time to take a deep breath and prepare for more volatility,” says Russ Koesterich, global chief investment strategist at BlackRock, the giant asset management firm. “Every client I meet is wondering whether these events – China, Puerto Rico, Greece – are the first cracks in the edifice like those we saw in 2007, but they aren’t that existential. We just aren’t used to this kind of volatility, so they are going to feel very, very dramatic, and be very serious with respect to the countries concerned.”
Translation: investors in US stocks have been too smug for too long. True, the bull market that began back in early 2009 has encountered some big headwinds along the way. When Europe’s debt crisis first flared up, US markets stalled; our own squabbles over whether to raise the debt ceiling had a similar impact. Early last year, biotechnology and some darlings of the technology stock universe were caught in a selloff when the market felt share prices had outstripped fundamentals, like the rate at which profits (if any!) and sales were growing.
This time around, however, there are several factors working simultaneously to send stock prices into a tailspin. Last week, all eyes were on Greece. True, its fate shouldn’t really matter to the S&P 500 or the Dow Jones – Greece’s share of the global gross domestic product is a mere 0.26%, smaller even than that of Iraq in the midst of its civil war. And it’s not as if we hadn’t seen this coming: the word “Grexit”, shorthand for a Greek exit from Europe’s monetary union and the euro, was coined in early 2012. But the treaty that created the new single currency didn’t provide for the possibility of a divorce among the countries abandoning their francs, pesetas and drachmas in favor of the euro. “So there’s no precedent for what happens next, and markets hate uncertainty,” says Koesterich.
China is another matter altogether. Its economic growth – even under pressure over much of the past decade – means that it is now the world’s second largest national economy. It is a crucial US trading partner, a source of goods and, increasingly, a market. If the country’s burgeoning middle class have lost their savings thanks to speculation in one of the most startling market bubbles since 1929, then what happens to the profits of companies like Starbucks, Colgate-Palmolive or Papa John’s International, which have bet on growing demand from just that demographic?
In the case of China, the speculative fever has been so intense that so far it’s impossible to know just what true market values might be for that country’s stocks. Already the almost apocalyptic selloff has wiped away $3tn from the value of Chinese stocks – and undoubtedly we haven’t heard the end of it.
What are ordinary investors, sitting comfortably in their living rooms or home offices here in North America, supposed to do about it all?
If I say “nothing at all”, your first instinct probably will be to have me carted off to the nearest asylum. And yet, what we’re seeing now in the US stock market is but the shadow of events that are taking place in overseas markets. So far, at least, they aren’t taking a toll on the profits or revenues of US companies, with a few exceptions. What they are doing is rattling the nerves of traders and investors and creating tremendous uncertainty – and fear and uncertainty are the worst enemies of financial markets. “The market will always focus on the shark that is swimming closest to the boat,” says Russ Koesterich.
There are a few steps you can take to ensure your portfolio is bulletproof, of course. If you are worried about liquidity – about being stuck owning something that you can’t sell when markets are moving very quickly, or when buyers vanish – you can opt to own index funds or exchange-traded funds tied to big, widely traded indexes. If it’s hard to trade an individual stock or even a large-cap stock fund, it will be much easier to trade one of these products in tougher and more volatile markets. Avoid borrowing to invest: margin debt is what is getting many of those Chinese speculators into so much trouble, and making the rout in Chinese markets even worse than it might otherwise be, as forced selling pushes markets even lower.
Given that so much of the turmoil is happening overseas, you can check your portfolio to see how much exposure you have to non-US markets. Don’t just look for foreign stocks or funds, though; think about how much a US company like Apple, for instance, earns by selling its products abroad, and how much economic problems – including changes in the value of the dollar – might affect those profits.
Ultimately, however, you will need to get accustomed to higher market volatility, of the kind that we saw yesterday. It may feel painful and ugly – especially when it’s accompanied by an unexplained technical malfunction on the part of the stock exchange’s trading systems. If you need some Valium to get through that transition, so be it; it will also help if you can wean yourself off CNBC, and stop following market events on a minute-by-minute basis. After all, we all are – or should be – invested for the long haul.
We’ve seen these levels of volatility before. We’ve survived. And the odds are that we’ll live to trade – or invest – another day.
Original Article
Source: theguardian.com/
Author: Suzanne McGee
No comments:
Post a Comment