Markets Drenched in Fear — Is It Justified?

I’m not sure I entirely agree with labeling the recent investors’ behavior as just another panic attack. A panic attack involves a certain degree of irrational thinking, and there was plenty of rational fear during the awful month of May. Actually, it turned out to be one of the worst Mays in the past 50 years, as investors hit the brakes and took the nearest exit off the troubled highway from the euro zone’s sovereign debt la-la land.
Of course, the European curse was not the only reason for the financial markets’ dismal showing during the month of May, but it seemed to be a recurring theme the first week of June, amply helped by disconcerting U.S. payroll reports, Hungary now joining the ranks of PIIGS (Portugal, Italy, Ireland, Greece and Spain), making me wonder what ingenious acronym would now be created and which letters could be added in the near future.Apparently, Hungary’s Prime Minister, Viktor Orban, turned out to be less than forthcoming about the true state of the country’s economic health. Shocking, indeed, as he joins the long line of either economic dilettantes or unbelievably stupid people who thought they could hide an entire country’s books and records in this day and age. On top of that, the troubled French bank Societe Generale has added to the melee with rumors about disturbing derivatives trading losses.I agree that fear-mongering is the last thing anyone needs these days. But how are investors to distinguish what are really frightening facts from what is nothing more than noise created in economic backwaters and rumor mills? Well, even if you decide to ignore all the permabears out there, myself included, as I cannot pretend I haven’t been quite a few shades darker than most of my colleagues, here are a few arguments keeping with the bear mindset for the time being.For example, it turns out that some equity markets have hit the much dreaded “death cross,” which in technical jargon means that shorter-term 12-day and/or 50-day moving averages have crossed below the longer term 200-day line. The death cross is usually an indicator that
points to a long-term bear on the horizon, especially if supported by strong trading volumes.And it is not just the death cross that is keeping investors on edge. Ordinary investors like you and me do not have the backing of the government. Our safety nets are of our own creation and are severely limited in scope should we lose sources of income, default on our debt, or fall ill. During the Great Recession, millions of Americans have lost their jobs, and gaining them back has proven exceedingly difficult, sometimes almost impossible. And, while our own dreams fell apart, we had to watch the government bailing out one institution after another, one troubled sector after another, etc. And, as things got less horrific along the way (not even slightly better, just a notch or two less bad than before), we kept hearing the often self-serving comments from politicians, economists and Wall Street about how the worst is over and how economic recovery is just around the corner.

With all that recovery “just around the corner,” to some investors, it seemed like it would never make the turn. Is it any wonder, then, that fear still rules investors’ behavior? Is it any wonder that investors no longer believe in their respective governments’ abilities to solve the
global economic problems? Is it that surprising that investors around the world have finally realized how fragile the market truly is and how wrought with instability it is? Just think of the May 6th flash crash that sent the market into a tailspin over someone’s “fat fingers.”

There have been so many speeches made and so much analysis done on the Great Recession. There has been so much money flushed down the toilet to fix it. There have been many new laws and regulations put in place to change things going forward. Yet none of these measures ha truly addressed the issue of the bona fide and, unfortunately, quite reasonable fear that investing has forever changed and that the market may no longer be the wheel moving the global economy forward, but a massive wrench thrown into it that threatens to stop it forever.