None of this should be a surprise. The correction has been in the air for months now. The record stock prices this past summer seemed a little too buoyant. October is always bad for stocks. None of this is a shock to anyone, save for the Globe and Mail headline writers.
Let’s keep things in perspective: A good 10% correction will get price earnings ratios in check.
Sure, this is dramatic. There is no doubt about that. Yesterday the Greek stock market was more than 10%. The Dow lost an amazing 400 points in one day. The price of oil is falling, imperiling the Calgary economy. Soon enough the vast retail herd of investors will begin to pick up on all of this and begin calling telling advisors to sell, sell, sell the portfolio. But please, let’s maintain some perspective here.
The S&P 500 is still trading at a PE of 18.05. The mean of the S&P 500 historically is 15.52. That is, to engage some rational thinking here, there is still a way to go yet to get over-inflated stock prices back to where they should have been in the first place. If you want to play an active stock picking game you should have been out of stocks in August when the valuations then, were, according to the numbers, far crazier than the current correction. If you’re still in, there’s no point now. You’re just locking in the losses. Sit tight, wait it out. Be patient. Things aren’t as bad as they seem.
Don’t forget, the price of oil is falling. This is going to provide relief to consumers. The earnings season isn’t a disaster. Alcoa kicked things off with a strong report. Corporations are producing vast profits. Hundreds of millions of American consumers are spending every day. Ebola is bad, especially when you fly people with the symptoms around the country on a plane. But thousands of people will die of influenza in North America this year. Where’s the outrage around that? Did we mention that money, with interest rates where they are, is, basically free?
You want real worry, how about this: The attempt by America and the House of Saud to drive down the price of oil as they did in the 1980s (when the Godless oil-revenue dependent Soviets were dealt a fatal blow) could, or could not, work again. Iran and Russia will be squeezed as the Saud-U.S. energy giant does whatever it can to flood the market with crude here in 2014. But the bigger problem, arguably, is that the fracked shale producers are radically indebted. Tight oil from shale is expensive to produce. These low prices will force cuts to production. Presumably tarsands projects will be scaled back. Any declines in real production numbers will just set the system up for higher prices down the road. History, and depletion, only move in one direction—the price of oil will be back up again at some point.
The real issues today are much bigger than a rational stock market correction. The radically low interest rates are, to be honest, a result of the fact global daily crude oil production, has, after a century and a half, stopped expanding as rapidly as it has for all of the post-war era (as it clear in the most basic USGS flow data). The global economic system is now growing more slowly as overall energy availability is no longer expanding. Bill Gross may have been engaging in “increasingly erratic” behavior this past summer. But maybe he was just reading the writing on the wall—the global economy is into a new and permanent era of lower, slower growth as we cross Hubbert’s peak. Gross had a term for this, the “New Neutral,” an era in which asset returns will less than what they have been through the post-war era. The costs of climate change; permanently higher energy prices; food price increases as a result of the California drought; the costs to fix a crumbling 50-year old post-war infrastructure—these are the new costs. These are the things that are going to sap cultural capital that might otherwise (in an easier, more sunny world) been converted to asset returns. Important today is to talk to clients about making their financial life more resilient, stable and manageable. In an era when risk-adjusted returns could be 4% or less as the demographic challenges mount (and consumer spending contracts) financial advice is going to have to be about reining in spending, reducing expenses, building up the financial cushions to manage the volatility of this weird over-leverage, over-heating, over-populated era. So the froth is off the stock market. So what? These things happen. This is rational when you look at the numbers. The real issues are way bigger.
Remember, it was only a couple years ago—mid-2008—the Dow was under 7,000. Now everyone is panicked about a 400-point drop on a 17,000 Dow? Please, call when something interesting happens. . For those who got greedy, for those who couldn’t handle the low bond yields and took on risk, well, this is, as Radiohead once put it, is what you get [embed link on words “you get
”. For those playing the long, steady and resilient game, these things will pass. Maintain perspective. Keep calm, carry on.