Written by Mark Govoni
Yesterdays’ opening thousand point swoon, while not a percentage record, was certainly eye-opening. It was equally as startling if you saw how quickly markets recovered from the flush lower. On the face of it the near 10% two week decline in the Dow should satisfy the need for corrective action in the major indices. We would argue that valuations (between 13 and 15 times next year’s estimates) most probably have fallen sufficiently to re-establish value. The problem is that whatever caused yesterday’s remarkable opening had little or nothing to do with investing. We will be debating this issue for the next two years, but you don’t need to be a regulator to see the footprint of algorithms and high frequency traders (HFT). The HFT crowd and their lobbyists argue that they perform a service to the stability and liquidity of the markets as a whole. If that is liquidity I will take my chances with the floor brokers.
Opinions aside, we believe that we have seen the bottoms, we are yet to satisfy the amount of time we need to spend at those bottoms. It is disconcerting and somehow unfulfilling when computers set the parameters of what is essentially a psychological exercise. We have corrections in the market for two reasons; to move stocks from weak hands into stronger hands and to re-establish value metrics. I would argue that both of those outcomes are arrived at through the interaction of the most primal of all instincts. If we are not allowed to fully experience the catharsis which is portrayed through the corrective process, we are unable to satisfy fully the two main goals of the market correction. Perhaps this is the natural outcome of investment by machine. Perhaps sentiment is an old fashioned emotion.
Our take is that we should retest lows, spend some time lower and reignite buying interest. We are not of the opinion that global growth has been significantly diminished. We are also not of the opinion that global growth is anywhere near potential. More of the same is probably what we have. It will be years before interest rates become normalized and in that environment we need to continue to own high quality stocks for the long term.