For many years, whenever any global economy threatened to run out of steam, the US consumer would step in to save the day. Now, it seems, the US consumer is tapped out — at least when it comes to personal consumption expenditures.
But looking at the action in the stock market today and over the past week or so, I wonder if the indefatigable US consumer isn’t simply shifting his attention to stocks. Dow 10,000? Must be a buying opportunity!
Stocks aren’t cheap — certainly not when compared to bonds. But when stocks have fallen a lot, people rush in to buy "bargains" based on nothing more than the all-but-meaningless metric of percentage off all-time highs.
The magnitude of the housing crash, in terms of percentage off highs, is important, because such a vast proportion of the population either bought or refinanced at top-of-the-bubble valuations. But that doesn’t make houses cheap. In the case of stocks, the percentage-off-highs number is not important, because there wasn’t particularly high volume at those high points in any case. And it’s certainly not a bullish indicator, as some of the value investors at today’s conference maybe hoped.
Both days that we’ve seen a 700-point down move in the Dow, it’s been followed by a sharp and immediate retracement of about half the losses. I put that down to bargain hunters, looking at the sell-off like they might a 30% off sticker at their local department store.
Or put it this way: there’s a huge "sale" going on in the credit markets too, but the credit markets are largely inaccessible to retail investors, who discount future cashflows at a much lower interest rate than anybody who’s actually tried to borrow money in this market. When stocks fall towards the kind of levels implied by credit-market discount rates, retail investors, with their much lower discount rates, step in and catch the falling knife. So far, they’ve ended up very bloody every time they’ve tried to pull off this act.
A smarter move, for a long-term investor, would be to wait for the credit markets to return to some semblance of normality before jumping into stocks. You might not buy at the absolute bottom — but anybody who fancies themselves a market timer is deluded anyway. And you’ll have much less in the way of downside.