Joe,
This is exactly what this thread is about.
As long as your dealing with a standard market, a 20% correction or whatever have no cardinal consequences to the economy. But consider the recently coined phrases momentum investors and growth stocks (used to describe multinationals and not small caps). Those tell you about the nature of investors in this market. A prudent and rational investor (show me one) has almost no options in the current environment. KO ? GE ? What rational investor would even consider them at current prices other then as a short opportunity, which is not an option a prudent investor will like?
The profile of John D. Investor has changed in the recent years to the worse.
We are adjusting to the changing environment and changing our way of looking at stock prices, so that even if we think valuations are outrageous many investors will be satisfied to buy Coke in a 20% discount, not considering the new PE or price to book as still very high. In fact not considering them at all. When looking at stock prices only in comparison to recent prices all meaning of price is lost, hence momentum investors.
The exposure of small investors to the stock market is unprecedented. Add the disturbing #s of personal debt and you get a highly explosive mixture. The huge sums that poured into mutual funds in the last three years and the low cash percentage the mutual funds hold add the flame below this mixture.
When markets become so agitated they also become very vulnerable. A 20% drop will give many margined investors a formidable blow, erasing them from the scoreboard. When the market will refuse to rebound to new highs, many investors will come to the realization that you don't always profit immediately from holding stocks.
Next, as the flow of money start shifting out of the market, the strong consumer confidence will fade, and both debtors and loaners will stop to think about repay. The snow ball of depression will start rolling.
If the Dow was 5000 today, then a 20% down turn would not be harmful to the economy, because there would have been much less :
-Margined small investors (by utilizing loans money to buy stocks or by trading options)
-Momentum investors (that tell you why Dell is worth current price, not why it'll be worth more next year, cause next year's and the year after growth is already compounded into today's price).
-Airtime to the stock market. Well it's practically a national hobby. Everybody's already in and that's when the Game Over sign starts flashing.
Arik. |
