What caught my eye this week.
A long-time Monevator reader asked me this week why we haven’t written something in the vein of the Covid crisis Do Not Sell special that inspired a thousand (okay, four) T-Shirts?
The quick answer is – as my co-blogger The Accumulator said on that day in March 2020 – we don’t like to get involved in day-to-day market commentary. Especially not for passive investors.
This isn’t just because we don’t think we have much insight into where the market will go next.
(No great humility on our part, we think almost nobody has that edge).
Rather it’s also because we believe it’s unhelpful for most people to try to make the market timing decisions that thinking you know better can inspire.
Calm tweaks to allocations decided on a Sunday morning when the markets are closed are one thing.
Dumping half your stocks on Monday because a man on YouTube is shouting: very different.
Chronic disability
But there’s a more difficult explanation as to why this isn’t a Covid crash moment to my mind.
In short some of the drivers of this US sell-off are arguably more serious than a global pandemic. At least from an investing perspective, but maybe on a long-term human history view, too.
That’s because something is happening in the US that I don’t think we can dismiss as business-as-usual.
True, it’s too soon to know what America apparently going rogue will mean for geopolitics and trade.
And for sure if after all the shouting we just have a bit more defence spending in Europe, some self-defeating but limited tariffs, and an even more winner-takes-all society in the US, that’s hardly existential.
But if this does escalate into a 1930s-style tit-for-tat global trade war then we can probably look forward to a deep recession, if not a depression.
And that’s to say nothing of the obvious threats to stability of a truly disintegrating global order, if that came about too.
The nukes haven’t gone anywhere.
No vaccination against economic illiteracy
So how should markets price in all this?
Probably much as they are is my best guess. The declines seem pretty orderly to me.
That might sound odd after one of the fastest circa 10% corrections in US stock market history – and against a cacophony of ‘hold the lines!’ from US commentators that mostly make things feel worse.
But we could expect a lot worse given the potential lasting damage to growth and cooperation that we’d see from a Trump administration that truly did what it’s saying it’s going to do.
Without wanting to re-litigate every turn of the pandemic, once it was clear that most people recovered from infection and that the oldest were the most vulnerable, it was always likely to end relatively quickly.
We had a ton of medical history to show that.
Millions might die – did die – and the upheaval could have – is having – long-term social and political consequences. But global productivity didn’t have to be indefinitely impaired.
However that’s not true of destructive nationalistic trade wars.
The global economy will surely become less efficient. And nationalism goes hand-in-hand with conflict.
I hardly need to state the worst cases from the last century to demonstrate where this could lead.
Do not sell. Probably.
Of course most people shouldn’t sell on this escalating drama.
But that’s because a strategy of regularly trying to make such decisions will probably reduce your long-term returns, due to poor trading decisions.
It’s not because hindsight won’t show us that selling this particular time and buying back in one, five, or ten years time wasn’t retrospectively the right move.
However if you have that kind of foresight, you probably already know about it. But nearly everyone doesn’t. And nobody is even close to perfect.
(Spoiler alert: the shouting bloke on YouTube doesn’t make the grade.)
Never-ending stories
Remember too that – as always – there’s a confluence of factors behind this recent sell-off.
China unveiling of its supposedly el cheapo DeepSeek AI innovation has blown the froth off the largest US tech firms. These had become such an enormous share of the market – as discussed here and elsewhere – that even small de-ratings have huge consequences on the index level.
Then there’s the US exceptionalism story that was at its height by the end of 2024.
This basically boiled down to ‘US stocks go up the most because US stocks have gone up the most’.
I’m serious!
I could write a fancy treatise about capital going to where it’s treated best or the European regulatory burden, the privilege of having the world’s reserve currency, or the role of Silicon Valley VCs and high-skilled immigration in keeping North America on the cutting-edge.
But honestly, from a market perspective I think US stocks went up a lot for a very long time and that this probably sucked in too much money in the expectation of even more.
Whereas now investors are slashing their US holdings by the most ever, according to Bank of America.
Money is piling into a fiscally-emboldened Germany as it reportedly flees the US.
Global fund managers are even – pass the smelling salts – putting more money into the UK.
Finally, if we take Trump and Elon Musk at their word (you do you) then the US has embarked on an enormous shrinking of the state, ultimately in an effort to reduce its vast deficit and national debt.
Compare that with Germany – finally taking the spending brakes off – and you could paint everything we’re seeing as yet another QE/fiscal story. Capital leaving a retrenching US to go where money is getting easier in Germany.
Crashing bore
Could the US fall to proper bear market levels? Could it be down 20-30% by next year?
Yes, I think that’s quite possible.
But then again, it’s always possible. No need to send me a prize if it happens.
It’s nothing likely a certainty, however. And in some ways improbable.
American household and company balance sheets are in good shape. Meanwhile the US Central Bank has shown little stomach for deep drawdowns, so we could expect some kind of emergency rate-cut package to take the edge off any falls.
And this is not to even get into exactly what the US administration will do, versus how much is noise.
Trump is such a chaos agent, you could even argue his reputation has made this latest drawdown more orderly than it would be under a traditional US leader with a similar trade agenda.
While the enthusiasm for US tech stocks, say, got very giddy, I doubt hedge funds and other massive pools of capital went all-in on business as usual following Trump’s election last November.
Which in turn implies such institutions wouldn’t have gone overboard with leverage and the like, either.
It was perhaps telling that Bill Ackman said in his recent Pershing Square report that the fund didn’t put on any of the asymmetric bets that have made it billions previously. For Ackman’s taste the options and other securities Pershing Square uses to put on those trades never got cheap enough.
Which might tell us markets, perhaps surprisingly, weren’t overly-complacent about risk in 2024 after all.
Reinvigorating reading
We’re now going deep into the weeds for the tastes of most readers, though. So I’ll conclude with three good articles on the recent wobble.
They are well worth a read if you’re anxious:
- The price of admission – Charlie Bilello
- A correction, not a crisis – Optimistic Callie
- If equity markets didn’t fall as much their returns would be lower – Behavioural Investment
Have a great weekend!
