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The Mother of All Overreactions
By Bob Veres
August 9, 2011
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As many of you know, I have a service connected with Inside Information where I send out client articles that advisors can send to their clients about things exactly like the Treasury downgrade and the subsequent bloodbath on Wall Street. The most recent message I sent out, Monday afternoon, was entitled "The Mother of All Overreactions."
The point, of course, was that absolutely none of the market fundamentals had changed from, say, Wednesday to Monday. The S&P ratings agency -- those stalwart vigilantes of solvency who rated boatloads of subprime junk debt as AAA, who raised the credit rating of Bear Stearns five notches to AA- in the same month the company declared bankruptcy, that had Lehman Brothers rated A the week it went under and made similar mistakes with Morgan Stanley, Merrill Lynch and the Republic of Iceland -- had decided that the U.S. government was a risky borrower at a time when global investors are beating down the door to lend to the Treasury at astonishingly low rates.
In fact, after the downgrade, there was a rush to lend more money at even lower rates.
Corporate profits are still robust if not at record levels. The economy is still recovering, albeit not as fast as some of us would like. I said in the Client Article that advisors sent out Tuesday that this was perhaps the clearest example of emotions driving the market that we have seen since, well, 2008.
To my mind, the driver of this fearful selling is not the ratings downgrade, but the appalling spectacle we saw in Washington during the debt ceiling debate. I think a lot of us watched the drama with our jaws nearly touching the floor and long after the "compromise" was reached, we were still staring with our mouths open in expressions somehow beyond disbelief in the general direction of Washington.
And that raises a delicate question: how do you talk to your clients about the debt ceiling and budget battles when so many people are strongly, perhaps not always rationally, on one side or the other of the political divide? Suddenly, loss of confidence in our country's legislative and executive leadership is driving loss of confidence in the markets; the two are now linked in ways that we may never have seen before.
Of course, I don't have the answer to this, except to suggest that it may be time for all of us to snap out of a partisan position and try to do what Washington seems unable to do: talk about America's long-term challenges in an adult and non-partisan way and -- where we can -- to lead the client back to some eternal truths about investing:
-- A panic is never a good selling opportunity, but they are often good buying (or rebalancing) opportunities for those who have the strength to make the difficult call.
-- Despite the mania of the moment (euphoria, greed, panic), market fundamentals and valuations are always the long-term determinator of stock prices.
-- None of us can know what is going to happen in the future, and that includes not knowing if tomorrow or next week will bring on the mother of all bull markets when everybody least expects it.
In my Client Articles, I talked about some of the odd contradictions in the whole idea of a debt ceiling (only Denmark among developed nations has something comparable) and showed which nations still have AAA ratings (of those on the list, France seems much shakier than the U.S.), and of course made good fun of the S&P ratings organization. I think there is always an entertaining side to these market blow-ups, even if we only appreciate the humor after our portfolios have finally crawled back out of the hole.
But I think these are dangerous times for advisory clients who have to be prevented, for their financial well-being, from spooking and running with the herd. And they are dangerous times for advisors, because you run the danger of triggering a partisan political response when all you're trying to do is have a mature discussion about the challenges our country faces. Meanwhile, your clients are expecting you to go defensive right after the market has turned down and made offensive a better strategy.
If you have suggestions on how to do this interesting new dance, I'd like to hear them.
What do you think?
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For more on planning, client service, practice management and marketing, or to join the Inside Information community, contact Bob Veres at Bob@BobVeres.com or go to http://www.bobveres.com/. For more information about the Business & Wealth Management Conference (October 13-15), go to http://www.signupforconference.com/.
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