The new touchphrase in investment meetings is "responsive." We have to be responsive to this situat...
The new touchphrase in investment meetings is "responsive." We have to be responsive to this situation, responsive to that influence, responsive to our warm gut feelings as well as those cold indicators. This do-or-die attitude is getting people into trouble. It is leading to a series of over-reactions one way or the other, and often both, which is muddle-headed, expensive and wrong.
In the wider context, there is constant pressure for authorities to "do something" in the face of an unexpected or unpleasant event. This shaky starting point is then compounded by poorly considered decisions made under pressure. Many investors are getting pulled into the same trap.
Their memories are short and their convictions are held passionately, but ever so briefly.
A month ago, for example, the general concern was that the US, the world's lead economy, would not be able to achieve a "soft landing", a controlled slowdown of runaway economic growth. Fears grew that the US Federal Reserve, provoked by a year end rally in the stock market, would ratchet up interest rates. Rising oil prices provided another focus for a mini panic.
Now sentiment has swung strongly the other way. It's all gloom and misery and suddenly it is very urgent that the Fed cuts rates as soon as possible. Consumer confidence is down, weekly unemployment claims are rising, and the stock market is in free fall. Those who attach importance to the influence of political figureheads are even suggesting that the lack of a result from the US presidential election is to blame for the 20% fall in Nasdaq since 6 November.
That red herring just demonstrates some investors' need to find something to worry about. The election is a mere sideshow to real economic issues. Nasdaq, the technology-laden index, is now quoted as if it is the US market. Yet technology accounts for just 30% of the total market by capitalisation, and, even more tellingly, TMT businesses represent no more than 8% of US GDP.
Outside Nasdaq, things are doing OK, thank you very much. The Dow Jones index (remember that one?) is 11% below its record high. Lower, but not disastrous. Datastream's index of stock market prices excluding TMT companies hit an all time high on 6 November, and is only slightly off that level now. It seems like a lot of noise is being made by a few people stuck on the wrong side of the market. If you are sitting among "old economy" you're alright, Jack.
Globally, the same mismatch of sentiment and conditions seems to apply. The consensus is that economic growth has stalled in Europe, inflation is creeping up and the currency is beyond redemption. It has been like that for months. But that does not mean it cannot change. Tax legislation is an eye-glazing matter, but the fact is that Germany, France, the Netherlands and Spain, for a start, are in line for a fiscal boost from tax changes effective from the New Year.
With more money in their pockets, and given their weak savings record, it is a racing certainty that eurozone consumers will start to spend. The region's exporters will still be benefiting from the weak euro. Slower US growth is just starting to drag on the dollar, which could signal the beginning of the euro's revival. For Europe, a real snorting bull run has been a long time coming, but the wait could be worth it. The time to be "responsive" is when things are happening, not when they are not.
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