Anytime the stock market craters - like it did two weeks ago- you can be sure people (not just investors) want to have answers. To refresh memories, on Monday, August 5th the Japanese stock market had its worst day since 1987, dropping 12.4% and U.S. stocks cratered by over 1,000 points on the DOW. At the same time, Wall Street's 'fear gauge' - the VIX index of volatility - shot up more than 50 percent to its highest level since the pandemic days of 2020.
The following day, August 6th, Japanese stocks bounced back by 10% while the S&P 500 gained 1 % and the VIX fell by 28%. By week's end stocks stood not far below where they were before the wild ride. What happened? What spurred the hysteria? Well, hysteria and lack of critical thinking as WSJ's Jason Zweig interpreted it. From my own perspective, after decades of following the markets (ever since the crash of 1987), it amounts to consistent over-reaction by investors and traders, to any and everything.
War brewing in the Middle East? Watch out! The DOW is likely to dive. Too many tapping unemployment benefits, or too low a monthly jobs number - watch out! Inflation too high or Feds mulling interest rate hikes, watch out! Any or all of these can bring a correction or a crash. This is one reason many of us left the stock market ages ago. We opted instead to plow our savings into immediate fixed annuities to be able to have a dependable fixed lifetime income, no matter the world's events, weather disasters or any other outside factors.
As for the theories about the crash Aug. 5th, there were several trotted out. Among them, big hedge funds had borrowed in cheap Japanese yen to buy U.S. stocks and other assets, then panicked when the yen suddenly rose against other currencies. (Since this made borrowing more costly).
Another theory: Investors suddenly lost confidence - given the lower job number (114,000) that the Federal Reserve could prevent the economy from falling into recession. As I told Janice, at least they got 'tuned up' for what might be the real thing in a year, if enough dummies vote Trump back into power. Because the orange moron, vowing 10-20% tariffs on foreign goods across the board, will likely trigger massive layoffs, the highest inflation since the oil shock of the 70s and yeah, a deep recession. Or even Depression. And yet some 56% of American dupes (according to a poll this a.m.) still think him to be "better on the economy".
Anyway, I side more with Jason Zweig's conjecture about what happened to trigger the cratering of stocks two weeks ago. In his words:
"The extraordinary smoothness of markets over the past year and a half had goaded hedge funds and other big traders into taking ever escalating amounts of risk. From Feb. 22, 2023 to this July 23, the S&P 500 never dropped more than 2% in a day, the longest such streak in more than 17 years, But you can only stretch a rubber band so far until it snaps, and when it snaps it stings.
The simplest explanation of all: Markets went haywire because markets consist of people and crazy behavior is contagious. To paraphrase Mark Twain: 'Truth is stranger than fiction because fiction has to make sense.' Markets don't."
He then goes on to cite Nobel laureate in economics Paul Samuelson who argued that while markets are "micro-efficient" they are "macro-inefficient". Meaning that while investors are generally good at quickly integrating new information about individual securities, they are bad at sizing up macroeconomic developments that can affect assets like stocks, bonds or commodities.
Basically, as one expert pointed out to Zweig, macro-inefficiency arises because while an individual security (e.g. bond) is fairly stable, broader bundles of assets are not. Thus, these "can be swayed by countless forces" making their value more subjective, as well as fragile.
This is basically why neither of us has any skin in the stock market, or the bond market. We dislike the runaway emotions of traders, or flash trade investors dictating the value of our money - from day to day, or month to month. And since there is zero chance of the human sympathetic nervous system changing or becoming more resilient in the face of oncoming threats (e.g. climate change, Trump etc.) we are quite ok with immediate fixed annuities. At least we can sleep at night!
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Immediate Annuities Remain The Best Bet to Secure A Decent Retirement
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