Wall Street has a new slogan for why stocks keep going up as the world falls apart: 'Nothing Matters'
- The mantra on Wall Street these days is "nothing matters."
- It seems no matter how huge the event - a debilitating virus ravaging China, the rise of Bernie Sanders - none of it matters. US stocks just go up, and in credit markets good debt trades close to junk.
- Consider this an extension of the inertia that has gripped US policymaking. We are frozen in an uncomfortable moment, and it will take the realization of a powerful event to change our circumstances.
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For the last few weeks one phrase has encapsulated the energy on Wall Street. It's very simple: "Nothing matters."
The phrase has become a catchall for a host of oddities that are making investors distrust the market. In this market investment grade (or, quality) credit yields about the same as junk. In this market huge geopolitical events are shrugged off as a mere blip. In this market the answer to any question is "buy stocks."
This may sound like a welcome simplification, but what it is is a suspension of reality. This is not how the world should work.
If "buy stocks" is the answer to every question in investing, then the entire game of Wall Street doesn't matter. There's no point figuring out what something is worth. Value has no meaning when everything is the same. Good is just as good as bad, because bad is probably fine.
In truth the market has been nihilistic like this for some time. But that it's persisting in this way despite the fact that a virus has brought the second-largest economy in the world to a standstill for almost a month is - frankly - starting to freak people out.
Guggenheim Investments CIO Scott Minerd likened this creepiness in the face of coronavirus to the calm that settled in Britain just before WWII, when Prime Minister Neville Chamberlain convinced himself and his peers that the world was entering a "peace for our time," and told everyone to ignore the red flags all around them.
"For those investors who perceive the disconnect between risk assets which are priced for a rosy outcome and the reality of the looming risks to growth and earnings, any attempt to reduce risk leads to underperformance," Minerd wrote. "It is a mind-numbing exercise for investors who see the cognitive dissonance. The frantic race to accumulate securities has cast price discovery to the side."
Unfortunately that means Wall Street is crowding now, which creates a dangerous situation in the event that there is a rush to the exits.
Wall Street will play this game until it's over. Standing up for value might be the right thing if you're a moralist, but it won't win you clients. Ultimately that means everyone in this market is chasing the same ok-yielding credit and blue chip or growth stocks. That's what happens when no one trusts the market.
The question is why this inertia taken over. I tend to think of it as lagging the inertia in our political system, combined with a lack of trust.
Nothing bad has happened yet
Last week Apple warned that coronavirus would take a chunk out of its earnings. The market dipped, but shrugged it off. At investment bank after investment bank the house view is that China will have coronavirus contained in short order.
"Our base case remains that the virus can be largely controlled by the end of March, and that the negative impact on the Chinese economy will be mostly confined to the first quarter, with a pent-up demand-driven rebound in 2Q onwards," analysts at UBS wrote last week.
Never mind that fewer than a third of China's 300 million migrant workers have returned to work, or that Chinese companies are warning that they won't make payroll, or that the entire global shipping trade has been disrupted as containers sit immobile. Never mind that the Chinese banking system is still recovering from a mini-meltdown last June.
It doesn't matter, everyone on Wall Street says, China will bounce back by the end of the first quarter and stocks will keep going up.
But how stocks keep going up is telling us something now too.
Over at The Street, Helene Meisler noted that, for the most part, stocks peaked around mid-January. Only the big cap indexes, the biggest safest stocks in the world, are moving.
Politics are just as frozen as the markets
Ask just about anyone in the markets what is to blame for this weird environment and they'll tell you it's the fact that interest rates haven't gone up meaningfully since the financial crisis. It's a good answer, but it's not the whole answer.
US rates haven't gone up because, while the economy is good by most widely-used measures, there seems to be a persistent lack of financial stability for many Americans.
Over at The Atlantic, Annie Lowery is calling it The Great Affordability Crisis. Sen. Elizabeth Warren talks about it on the campaign trail. Deloitte cited it as a reason why millennials have been slow to start their own families. While the Trump administration celebrates every monthly nudge of wage growth, it's important to remember that only 10 of the last 40 years saw consistent wage gains for workers.
American families are using a variety of things to make up for this shortfall of income, including credit. Average Americans are increasingly going into debt just to live their lives. These are problems we need to solve if the American economy is going to truly grow.
When these sorts of problems have popped up in the past, we've typically turned to with policy solutions. The only problem is: our policy solution machine is frozen.
Hundreds of bills sit on Senate Leader Mitch McConnell's desk, US President Trump's increasing paranoia has him busy hunting enemies within his own administration, and each party's solution for the problems that plague us are diametrically opposed.
Precious little is getting done, and Trump has never displayed much of an interest in governing anyway. Now it seems his party isn't much interested in it either. All that leaves for them in the game of politics is the winning, which is what Republicans are interested in at all costs.
This inertia has been passed on to the market in the form of persistently low rates. It is a state of affairs that is not to be trusted. It isn't sustainable, and it won't fix itself either. The only question is, what will be the event large enough to make things matter again, to get things moving and force us to do price discovery and assign value?
Probably doesn't matter. Dow one trillion.
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