"The stock market could really use a good sell-off" I told a friend/client last Friday. He replied "absolutely!" And I swear he meant it. Yeah, I know, the individual investor has been MIA this go round (according to mutual fund in/outflows), and has therefore missed a very nice run in stocks---but, I’m happy to report, the individual investors I know pretty much get it. Of course most of the individual investors I know are my clients, and while they may miss (ignore) many of my daily missives, when the market's taking a hit, my blog takes hits galore. Which means folks need perspective when things get wacky.
Well, just when it almost seemed safe for the individual investor (not the one I know) to get back in the water, something happened in the water just 40 miles south of Turkey. There's this little speck on the map where about a million folks live, where they produce about $24 billion a year in goods and services, where they do their business in Euros, and where, come Tuesday, every one of its citizens with a bank account will involuntarily contribute (be robbed of) 7% to 10% of his/her balance toward bailing out their country. Yes, Cyprus is in a bit of a fix. And, consequently, as I type, the Euro is tanking, Asian stock markets are off around 2% across the board (that would be 280 Dow points here), and Dow futures are trading down about 150.
And why would such an event---to secure a bailout the size of roughly a day and a half of U.S. government spending---send global markets into a tizzy? Good question! I'll answer in four easy bullet points:
• Because folks who've been in the market awhile — and who haven't been paying attention to how effective the market has been at forcing politicians to kick cans down roads — have some nice short-term gains they'd like to preserve.
• Because folks in other struggling Euro zone nations will surely close their bank accounts in fear that it could happen to them. And that would not bode well on a number of fronts. Not the least of which being the prices of those nations' sovereign debt going forward.
• Because (on another front), given the obvious, a run (mass depositor exodus) on Euro zone banks would no doubt spark a sharp sell-off in equity markets.
• Because a tanking Euro means a rallying dollar, which means U.S. exports become more expensive, which means multinational companies' earnings could suffer. Never mind that a stronger U.S. dollar means a stronger U.S. consumer.
Now I could try and soothe your nerves by telling you that soothing words are on the way from the ECB, that what happens in Cyprus stays in Cyprus, that the Troika (the European Central Bank, the European Union and the International Monetary Fund) have worked too hard, and, they believe (I'm a skeptic), come too far to allow tiny Cyprus (although, of course, the “Troika” is setting the terms) to derail their plans. But I don't want to. All I want to tell you is, that, in spite of the fact that Alan Greenspan thinks stocks (as of last Friday) are cheap---I know, I haven't been a fan, but he did coin the phrase "irrational exuberance" during the late 90s---the healthiest thing right about now, whatever the catalyst, would be a sell-off of more than a couple dozen Dow points. You see sellers gotta win every now and again---it keeps fresh cash on the sidelines. And, from what I gather, it's not just the individual investor who has missed the party---there's a contingent of hurting hedge (and mutual) fund managers out there who've been praying for that 5+% correction so they can get their clients' cash to work and, hopefully, save their careers.
It'll be interesting to see how long, or how deep, the correction (if that's what's presently in store) runs before a new rush of cash hits the market.