Irrational Exuberance Corrections

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There have been crazier markets then the ones we have now but more and more analysts and trading professionals are fessing up this one is starting to top them all. The quickest fall from an all-time new high to not only an official correction (down 10%) but an all-out bear market designation (down 20%) occurred during the March downturn, only to be followed by an historic and blistering recovery which placed the Dow within a healthy spitting distance of that all time high two months later. 

Wild swings up and down (but mostly up) have investors and professional money managers looking over their shoulders for the Archangel or the devil himself, depending on which way their portfolio swung that day. 

June 11th witnessed an 1861 point hammering of the Dow Jones Industrial Average (DJIA), down 7% from the day before. The next day the DJIA ricocheted up 477 points.

Whoa.

Professional traders love the volatility which can bring fast profits. Day traders have come out of the wood work, some shut in from the CoVid-19 event and some flush with cash from stimulus and unemployment checks. Indeed, trading volume is heavy and theories abound as to what comes next. 

Meanwhile those not akin to these casinos like markets and/or just trying to save for retirement may find the violent ups and downs not at all conducive to a full night’s sleep.

What is confusing everyone including the heavy weight professionals like Warren Buffet, David Tepper and other gigantic hedge fund managers is the speed of the March fall and the subsequent lighting fast recovery. Few if any forecasted such wild and violent swings, and the speed of the recovery in light of the obvious ailing economy was and is still an unexpected turn of events. 

Explanations and theories as to why markets are moving so violently include; investors are eager to buy stocks at bargain prices, the Fed is throwing trillions into the economic feeding troughs of corporate America and that trillions more are going directly to consumers.

This analyst, and many of my peers, attribute much of the markets recovery to the Federal Reserves’ willingness to go “all in” to avoid a catastrophic collapse due to the CoVid 19 shutdown. With trillions going to support debt assets like corporate bonds, trillions more to consumers and business owners and even more trillions in Quantitative Easing (Feds buying Treasury, mortgage and other public and private debt), the amount of money being injected everywhere means some of it is bound to find its way into the stock market, and it has.

That’s not to say the disconnect between the market and the economy makes total sense. Indeed, the argument could be made the Fed is doing what is always has done in recent decades: throw money at corporate America in the hopes that fewer corporations will be vaporized in bankruptcy, others will be able to access the debt markets in order to survive, and that some of that money will trickle down to workers. 

In contrast to the 2008/09 crisis, this time around more money is being shuttled into the hands of consumers and small businesses through liberalized unemployment programs and a variety of loan and CARE programs. 

This is not to say the all clear can be given. There are many realities that may dampen the exuberance that investors may have succumbed to in the recent market run up.

With last week’s Dow 1800-point hammering, stock participants may be rethinking just how bad (or good) the economy may be coming out the other side of the shutdown. Indeed, we may find we emerge from the CoVid shutdown funk only to see a spike in new cases due to what some call premature reopening, mass protest gatherings due to the recent racial issues, or a lackadaisical attitude toward the virus itself. 

Other considerations would also have to include the damage done to the economy will be much worse than expected, will last longer than expected and some damage done will never be undone. The business landscape may be permanently altered which will require some sort of adaptation or rethinking of how business should be conducted. This shift in business methodology may incur significant transitional costs which will take time to unwind because of the resource and monetary reallocation that in itself could cause more economic damage.

This article expresses the opinions of Marc Cuniberti and should not be construed as individual investment advice. No one can predict market movements. Investing involves risk. You can lose money. Mr. Cuniberti is an investment advisor representative through Cambridge Investor Research Advisors Inc. a registered investment advisor. California insurance license 0L34249

Marc Cuniberti

Marc Cuniberti hosts Money Matters Financial Radio and the Money Management Radio on KVMR FM and is carried on 66 stations nationwide. He is a financial columnist for the Union News and half a dozen newspaper publications. Marc holds a degree in Economics with Honors from San Diego State University. He is a registered financial advisor for SMC Wealth Management in Auburn, California. He holds California Insurance License 0L34249 and is the owner of BAP Inc. Insurance Services. He also owns Bay Area Process Inc., an engineering and services corporation. He is the founder and producer of the video series “Investing in Community” carried on NCTV and on 65 social media sites. He is also the founder and administrator of Money Matters, Investing in Community Video Series, Fire Insurance Information and Inquiries, Daily Laughter and Inspiration and Nevada City Peeps Facebook pages. He has appeared on NBC and ABC television and the subject of a host of TV documentaries for his financial insights, successfully calling the banking and real estate implosion of 2008 two years before it occurred. Marc holds a masters teaching certification in Tae Kwon Do martial arts and is a big brother for the Big Brothers Big Sisters program in Nevada County. He is presently media consultant for the IFM Food Bank of Nevada County.

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