Stockmarkets have begun 2016 like a bunch of surly and hungover teenagers on New Year’s Day. China’s blue-chip index, the Shanghai Composite, fell 6.86% to open the year. The index made up of smaller companies, the Shenzhen Composite, fell by 8.22%. Stocks in Japan (-3.1%), Hong Kong (-2.68%), and Korea (-2.2%) all fell in head-sore sympathy. Or were they just sulking?
Either way, Chinese officials had enough of the moody market and shut it down early in the afternoon. After a 7.2% fall in yet another benchmark index (the CSI 300), authorities had enough. Well, the circuit breakers had had enough. They kicked in and halted trading.
This proves a point Tim Price made late last year: when investors lose confidence in markets, the only way to prevent them from expressing their opinion (selling) is to shut down markets. If you don’t like the price signals you’re getting, unplug the price mechanism. It applies to stocks just as well as cash.
The trouble with a trading halt is that sell orders can pile up in the order book like a crowd crashing the gate at a crowded concert. The show must not go on! Trading halts are designed to give emotions time to cool.
A trader who can’t sell might, in theory, become more contemplative. His heart rate goes down. He wipes the sweat off his brow. His rational brain takes over from his amygdala.
We’ll see if it works. For now, investors are being treated like children. They’ve been told to go to the naughty corner and put away the keyboard. Put down the mouse and step away from the keyboard! In the meantime, let’s use the pause to think about what this could mean. I’ve come up with three possibilities.
First, this is more of the same from last year. If so, you sell emerging markets and commodities and buy the US dollar and the ‘Bagels’ and ‘Fangs’. What’s bad in the developing world could be good for the S&P 500. If this scenario is right, you should own more US tech stocks and fewer miners.
Second, low interest rates and $57trn in new global debt since 2009 aren’t working anymore (if they ever did). They can’t “bring forward” any more growth. All that growth is fully priced. It could be a bad year for equities, and only relatively better in certain markets. In that type of market (a bear market), your goal is to lose as little of your capital as possible.
The third possibility is that it’s just noise. Don’t worry. Everything’s fine. Play the long game. This is conventional view and you can read it in the papers so I won’t spend any more time on it here.
No one knows – or can know – what will happen. But I will note that Australian stocks only fell by half a per cent on Monday. The ASX/200 is chock full of mining, energy, and financial stocks. If Asia Pacific markets were signalling a deflationary depression, led by a collapse in credit expansion and an explosion in bad debts, you’d expect Australia to lead the charge, not lag it.
Australia’s blue chip index was down just under 18% in 2015. It’s still down 27% from its October 2007 high. It may take years to recover that peak. A rally in the gold price could help. And on that score, gold was up 1.18% to US$1072 on Monday. What gives?
Category: Market updates