With thanks to Freddie Mercury
Is this the real life?
Is this just fantasy?
Caught in a landslide,
No escape from reality.
Equity markets, global and domestic, have gone into a sudden paroxysm, calling Freddie Mercury’s immortal lines to mind. Nobody knows whether this is the “real” thing—meaning a collapse to match the worst we have seen—or just a terrifying wobble. But for seven trading sessions, markets everywhere have been throwing rocks at investors and nobody can say when it will end. No, let me correct that—I’m sure there are some brokers and analysts who call the end of the trauma each day, but then that is their job. The reality is that all the pieces for this drama were on stage for some time—highly overvalued stocks, a bull market that was accelerating, very, very low volatility, and an expectation that interest rates were going to rise, Indeed, the Fed had announced three rate hikes in 2018 very specifically, and with the US economy at near full employment, China—separately—exporting inflation, and global growth on a synchronised roll, the threat of a burst out of inflation is increasingly real.
Remarkably with the growth picture so rosy, markets are nervous about interest rates—in other words, the market is suddenly focusing on the negative rather than the positive. This suggests that everyone and his sister are overextended and this pull back could certainly accelerate or, at least, sustain for some time. The decline has, thus far at least, not yet hit 10%, a far cry from a bear market, but some low-grade growling can be heard. There are too many perma-bears who have been eating humble pie for several years to allow this opportunity to slip away. Perhaps equally alarming is that gold has also slipped and the commodity rally of the past year also seems to have gone silent. It looks like nobody is comfortable putting money anywhere. So, what to do? Well, I can only recommend returning to Freddie, who says:
Open your eyes,
Look up to the skies and see,
I’m just a poor boy, I need no sympathy,
Because I’m easy come, easy go,
Little high, little low,
Any way the wind blows doesn’t really matter to me, to me.
CEO, Mecklai Financial