“…what does not kill me makes me stronger.” —Friedrich Nietzsche
It has been the longest and deepest correction that the market has suffered since the autumn of 2012. At its worst, it had undone almost the entire advance that had occurred from mid-April through mid-May. That advance, in my opinion, had a solid start, if a somewhat fluffy finish.
I do not think it a coincidence that the market’s advance began as the first-quarter earnings reporting season ended. In that sense, it appears to have been something of a capitulation. Once again, corporations were able to meet or exceed diminished expectations. Once again, corporate earnings refused to walk the plank and plummet into the abyss. It was as if one of the plugs in the dam of disbelief had been pulled. The money flowed in and the skeptics headed for higher ground. (One of them famously opined that, while his predictions of disaster would still be proven right in the end, the equity market might rise for two years before it collapsed. I thank him for that clarification.)
In the month that followed the end of the quarter, equity prices rose and so did investor sentiment. Valuations did not become excessive, and investors, still on their guard for the next black swan, did not become complacent. However, a sense of exhilaration was in the air.
Well, there was little exhilaration on Wall Street last week. Far from it. By Monday, the fear was intense and immediate. The speed at which minds changed was a testament to the shallowness of any positive sentiment that a six-month rise in stock prices had engendered. Beneath a happy façade, investors remain tense, skeptical, and unsure, all of the characteristics that have traditionally defined the existence of an ongoing bear market.
In an odd way, the stated and obvious reasons for the pullback were even more encouraging. First, the market took fright at the chairman of the Federal Reserve’s mention of the ultimate end of the third round of quantitative easing (QE3). I think that the end of QE3 is inevitable. Nothing in this world is infinite, and in this case, we would not want it to be. I find it extremely encouraging that Ben Bernanke could see a light at the end of the tunnel. It would seem that the economy is getting better, and (to paraphrase General Motors’ “Engine Charlie” Wilson) in all but the shortest of time periods, what’s good for America is good for the stock market and vice versa.
I also think that the news out of China is more good than bad for the long run. It appears to me that the Central Bank of China, under a new administration, is tightening standards and policies because they were too loose, trying to wring excesses out of the system before they become uncontrollable. It is not trying to create a recession or a financial panic. So far, unlike 2008, things do not seem to be out of control.
I guess the best real-life analogy for what has gone on in the capital markets recently is “diet and exercise.” My doctor constantly prescribes it, and I attempt it with mixed results. Still, I know what it is all about. It is no fun passing up dessert or marching an extra mile. Yet, in my case, when I do it, I feel better afterward. Maybe there is a lesson in that for investors.