Time For A Little Perspective

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By Greg Jensen

So, it happened, and seemingly all at once. Ben Bernanke finally did start speaking about exiting from the massive bond buying program known as QE. It seems, however, that those predicting that any hint of such talk would cause a massive, immediate crash were a little too pessimistic. The major US indices faltered, but (so far at least) it is far from a crash. Disappointing numbers from China the next day, on top of Bernanke’s comments, led to a more serious drop in Asia. The Nikkei fell 7.3% and other Asian stock markets also had their worst day in a while.

The prospect of renewed volatility in stock markets is, if anything, welcomed by traders. It is just as easy to make money on a drop as on a run up. For individual investors with memories of 2000/2001 and 2008/2009 still fresh, though, it is a different story. They look at a 7% drop in a major index and the fear comes flooding back. I would maintain that, for now, there is no need to panic.

A 7.3% drop in the Nikkei sounds scary until you look at it in the context of what has been happening over the last year. The story of “Abenomics” and Japan’s expansionist policies have been covered in depth elsewhere, but I still think many investors are unaware of the effect that those policies have had on Japan’s stock market. On May 23rd 2012 the Nikkei closed at 8556.60. The high on May 23rd this year was 14483.98, a rise of just under 70%. Think about that for a second. Plus 70% in a year!

 

As the chart shows, the majority of that has come since November; on November 13th the index was at 8661. In the context of a +70% year, a 7% drop doesn’t seem so bad.

Over the same period, the S&P 500 is up around 26%, so a drop of around 2.5% would be the equivalent. This would be slightly worrying for sure, but hardly cause to panic. In fact, we haven’t seen anything like that. Following Bernanke’s hints at a more hawkish stance, the S&P closed down less than 1% on Wednesday against Tuesday’s close.  But, you might say, it lost all of the gains of that morning as well, and that was before we knew about the slowing in China. You would be right, so Thursday must have been a bloodbath, right? Well the S&P closed down 0.29%; the Dow reacted with even more sangfroid, closing effectively flat, down 0.08%.

I am not pretending that everything in the future is rosy, nor am I ignoring the distorting effects of QE3. It is just that, as of right now, the Fed is still pumping $85 Billion a month into the market. By beginning to talk about tapering off that easy monetary policy Bernanke has made a violent reaction to that inevitable change less likely. If that policy had led to bubbly conditions then I would be worried, but with a P/E of around 19 based on reported earnings and an improving earnings picture, we are a long way from irrational exuberance.

So, we have a market that is right where it should be that seems to be taking bad news in its stride, a gradually improving economy and continued easy monetary policy for now. I think it is best to view the Nikkei’s violent move as a necessary and long overdue correction and keep faith with domestic stocks, even if the next few days turn out to be a little choppy.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy , Bonds , Options

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