Wall Street Blues
My colleague David Rodriguez* once described the stock market as behaving like a group of 4th grade girls. The plunges of the past week certainly seem to corroborate that assessment. The market, in this as in so many situations, seems characterized by overreaction. Things are great, things are great, things are great, then suddenly things are HORRIBLE! Yes, China’s economic woes are significant and yes, it seems almost inevitable that those woes will impact markets worldwide. That said, here are a few reasons why I suspect it won’t be as bad as it looks:
- The fundamentals of our economy are really pretty good. Although growth has slowed, we are still looking at adequate improvements in both employment and overall economic growth. While it is true that in the new global economy everything affects everyone, we are in a less vulnerable position than many of our worldwide competitors.
- Corrections in overinflated value tend to be positive.When stock prices get out of whack with earnings, the markets begin to feel hyper inflated. A correction actually brings health back to the market by coupling stock prices and earnings multiples more closely together.
- Drops like this are in line with the historical record.The market rarely goes more than 3 or 4 years without some sort of correction; we have gone 6. It was time, maybe even past time, for a little wind to come out of these sails.
- Nothing goes up forever. Warren Buffet famously said (and I am paraphrasing here), “I feel nervous when people are buying, but I like buying when people are nervous.” One of the primary reasons that the Dow acts like a group of 4thgrade girls is that the lemmings reliably leap off the cliff, one after another. Over and over in moments like this people say to me, “Do you know how much money I lost today?” To which I tend to think (though not say), “Well, not really. You actually didn’t HAVE that money. It was based on some inflated valuations and what you have NOW is probably really more like what you should have had all along.”
- The Fed will likely postpone raising interest rates. The signals indicated that rate increases were likely to begin in September. Now, with the market outlook more uncertain, the likelihood of an imminent rate increase has substantially diminished.
In general I am a long term investor. Once you have been through ten or twelve corrections they don’t seem either so dramatic or scary. And of course I am a real estate broker, with a firm belief in the value over time of an asset which does not liquidate in 60 seconds when the market is experiencing turbulence. That’s one of the things I like about real estate. It is by nature impervious to reactive decision making.
No one knows how the stock market will perform in the coming days and weeks. After Monday morning’s dizzying 1,000-point drop, by midday the market had regained 75% of the loss. But I do know some things about real estate. We still face a fall market with low inventory. Price appreciation, which has been tempering throughout the year, will probably relax even more, leaving overpriced units more stranded as the tide fails to rise toward them. But I expect consistent consumer demand for properly priced properties, fueled by buyers who don’t make hasty decisions based on the herd mentality. In short, don’t panic! It probably won’t be so bad.
*David brokers mortgages at Citibank. He is a star!