"Economists have an elaborate term for an external event that can impact a market or economy: exogenous shock. Ranging from terrorist events to natural disasters, such shocks are usually unpredictable and can have indefinite real-world impacts. They can create an air of uncertainty for investors that can be especially tough on stocks ... In early February, the U.S. stock market suffered from the exogenous shock of rising nuclear tensions with Iran, which caused oil prices to shoot up to near $70 a barrel. Oil prices faded off those highs, though, and crossed below $60 as the tensions with Iran abated, helping the Dow Jones Industrial Average rally past 11000. But in the last few days, stocks stumbled again as an armed conflict in Nigeria, where a rebel group attacked oil facilities and took hostages, has pushed oil prices back up again. Oil gushed $1.42 a barrel Friday and tacked on another $1.31 to $62.60 a barrel on the New York Mercantile Exchange on Tuesday."
---(The Wall Street Journal -February 22, 2006)
Schaeffer's addendum: Yeah, those "exogenous shocks" can be brutal. Heck, the Dow has already plunged by more than 50 points since last Thursday after a 370-point rally during the preceding two weeks. Will investors be able to endure this pain much longer?
My point is that investors these days have been conditioned to believe that a downside "shock" consists of their favorite blue-chip stock declining by a half point. Conditioned by the volatility that has been strangled out of the market by premium sellers, by the certainty (wildly encouraged by Wall Street) that all pullbacks are "buying opportunities" and by the belief in the "Greenspan (now Bernanke) put" by which the Fed will support the stock market so as to preclude serious downside risk. This all works until it stops working, usually as a result of, yes, an "exogenous shock."
Head for the hills and put your cash under your mattress? No. But do continue to avoid the blue-chip rat's nest, stick with the "risky" sectors that continue to outperform (small and mid-cap, energy/metals, utilities and financials) and keep an aggressive cash reserve of 25 percent or more. And remember, no one will be more "shocked, shocked!" about the devastation wrought by a real exogenous shock than Wall Street.
Bernie Schaeffer
schaeffersresearch.com |
