Separating the Muck from the Mire

A couple bad days of trading and—literally—people are starting to lose it. The recent global market downturn has been short, sharp, and scary on no new fundamental news. It's all psychological. So far, it's been blamed on Greenspan (the poor guy's retired for goodness sake!), Big Ben Bernanke, hedge funds, China, and we're sure that somehow you can throw global warming and UFOs into the mix as a culprit too:

UFO Science Key to Halting Climate Change: Former Canadian Defense Minister
By Associated Press via Yahoo! News

It's getting pretty crazy out there, isn't it? Let's take a few moments to demythologize the situation.

First, a superb use of some good old fashioned, snarky sarcasm: "Call it the Great Man Theory of Markets. Big moves in the markets can't possibly be the result of complex forces acting on millions of investors, but must be the result of some one thing or some one person."

Fed Chiefs Had Little To Do With Market's Moves
By Dow Jones Newswire via Morningstar

Stock Market Slide Spawns Tales From the Crypt
By Caroline Baum, Bloomberg

And, here's a little perspective on China's actual size and effect on the global market. It's imperative to realize the difference between China's markets and their economy…

A Shanghai Education
By Editorial Staff, The Wall Street Journal (*Site requires registration)
https://www.wsj.com/articles/SB117271711009222921

The global economy is humming along. Nothing's changed over the last few days. Even the supposed huge downward revision of US GDP yesterday has more to do with inventory levels than actual economic output. Larry Kudlow's commentary in today's journal is a good synopsis of the overwhelming positive fundamentals out there:

The Prosperity Boom
By Lawrence Kudlow, The Wall Street Journal (*Site requires registration)
https://www.wsj.com/articles/SB117271832057922965

And to sweeten the deal, long term interest rates have taken a dive lately along with stock prices. This has widened the earnings yield versus bond yield gap even further, making stocks an even more exceptionally attractive buy. (See our past commentaries: "Flip it to See Stocks' Value" and "Multiple Expansion" for more.)

All these false fears are at the forefront while positive fundamentals and real risks are being ignored. Long have we written that one of the biggest current risks to markets is protectionism and regulation. We've been relieved to see that nothing big has happened so far…but the little things are starting to pile up.

First, more red tape, more bureaucracy, more "scrutiny"…and for what?

House Bill Boosts Scrutiny of Foreign Deals
By Greg Hitt, The Wall Street Journal (*Site requires registration)

Unions are making good on favors the Democrats owe them after the US mid-term elections and are creeping back into the picture.

Walter Reuther's Ghost
By Editorial Staff, The Wall Street Journal (*Site requires registration)
https://www.wsj.com/articles/SB117271722564522925

Overseas, corporate "greed" is being blamed for what is truly rampant government greed for tax revenues. Real and effective reforms are looking less probable by the day in Europe.

Taxing Wages
By Editorial Staff, The Wall Street Journal (*Site requires registration)
https://www.wsj.com/articles/SB117270492642822603

And finally, more government hijinks; this time in the form of tariffs that failed. The more government intervenes in the global economy, the more they muck it up. Adam Smith just rolled over in his grave.

Federal Aid Does Little For Free Trade's Losers
By Deborah Solomon, The Wall Street Journal (*Site requires registration)
https://www.wsj.com/articles/SB117271508949822864

None of these things, in and of themselves, are big enough to beat the markets down. But they're piling up and need to be watched closely because investors seem to be generally ignoring them right now in place of incorrect fears about the economy and China. But after sorting through all this muck and mire, we still see great reasons to be bullish and remain fully invested in stocks.