The war & the market, consensus and contrarianism
From yesterday's WSJ
"The Market's Mind Games" by Jesse Eisinger
The conventional wisdom is that the market will rally when the war begins. Given that, a smart investor might guess the consensus is already baked into stock prices, which means there wouldn't be a rally. But if everyone knows the consensus is always wrong, we could rally anyway.
Does your head hurt yet?
The template for current times is obvious: the first Gulf War in 1991. Then, as the template believers remind us, stocks fell ahead of the war and rallied when it started, gaining momentum as it became apparent U.S. forces weren't fighting a war so much as dictating one.
This forms the consensus, or what is believed to be the consensus: war will remove one of the several factors depressing prices.
But the only reason for the rally last time was investors were expecting a much tougher war. Thus time the general feeling is the war will go easily.
Then again, there's been plenty of conversation about all that could go wrong in Iraq. Even after the war, much could go sour with the peacemaking. Even if things go well in the rest of the world, the market would be left with a struggling U.S. economy and a lack of demand. That leads an investor to another prevalent line of thinking: sure a "Goodbye, Saddam" rally is coming, but it will be short lived.
Of course, if they really thought that, traders might buy right now anyway, which they're not. That leads one to wonder if, in fact, consensus is only being mouthed and nobody truly believes the rally scenario.
Perhaps this is good news, in the ping-pong logic that seems to holds sway over such things. The markets could rally because because even though people said they expected it, they didn't. "I think people who are running and hiding at this point are engaging in a behavior - the most sensible thing at the moment - which is not the smartest thing in the long run," says Jim Griffin, strategist at Aeltus Investment Management. "It smells like the kind of time that, if you are so intemperate as to take risk, you have a chance to get paid for it." |
