As Roseanne Roseannadanna was wont to say, “Well, Jane, it just goes to show you, it’s always something — if it ain’t one thing, it’s another.”
For a while now the capital markets have been trying to grapple with Greek issues – the referendum vote last weekend, tense negotiations among its creditors and trying to figure out how contagion might occur were Greece to default and/or leave the European Union. Now we can add to this toxic mix a stock market “meltdown” (to use the breathless phraseology of the capital markets media folks) in China.
China had been the hottest market on the planet until recently and some sort of correction would have not been all that surprising, but what troubles investors most (I surmise) is the Chinese government’s reaction to this volatility – they are trying to prop up the stock market by 1) suspending trading and 2) using the government’s capital to buy stocks. One wag described the situation well – “the invisible hand meets the iron fist.” Capitalism and free markets are messy things, and those wishing to control nearly everything may from time to time find this unsettling.
It’s not like government intervention in stock markets is unprecedented. Hong Kong in 1997 used its money to prop up the stock market during the great Asian crisis of the time. It was widely criticized for this policy (mostly by Western observers), but in the end, it turned out reasonably well. Not so well was Japan’s infamous “Price Keeping Operation (PKO)” in the early 1990s. Although never officially announced, everyone I knew (I was a Japan equity market strategist at the time) knew that the government was buying stocks directly or indirectly through moral suasion of insurance companies, banks, and pension funds. PKO might have put a floor on the market, but it took decades for Japanese investors to recoup their losses following the great bubble burst of the 1980s.
So what? As always, my crystal ball is a bit hazy about the near-term outlook. I suspect Greece will not have a big lasting impact on European or U.S. economies, but until the details of the current negotiations are finalized, we could continue to see some Greece-induced volatility. Greece’s biggest creditors now are the European Central Bank and the International Monetary Fund – representing the nation’s lenders of last resort. U.S. banks appear to have close to zero exposure; European banks’ exposure is also very low.
China’s situation is probably much more positive than Greece’s. The Chinese stock market’s recent strength can be linked to 1) a new program that opened the market to a huge wave of new money and 2) an explosion in margin lending. Given that this market is mostly driven by individual investors, it is more susceptible to the ebb and flow of fear and greed. We must not conclude that the Chinese economy is doing poorly because the nation’s volatile stock market. I sense that this is a “stock market” problem, not a “Chinese economy” problem. Over time, capital market always care more about fundamentals than sentiment.
Any weakness we might see in the U.S. stock market will probably be driven by the usual suspects selling some portion of their portfolios in an abundance of caution. I find it somewhat ironic that what is deemed an act of caution by a few and lead to increased volatility and concern for all.
I remain firm in my view that we are still in a secular bull market, and I would be a buyer of U.S. stocks on weakness