The last two weeks of volatility in the stock market offer a timeless lesson on market crashes: the thing that causes a crash is never the thing that you expect.
Asked at the beginning of the year to come up with a list of things that might make the stock market crash, I would have given you a long list of potential causes. China invades Taiwan, Putin nukes Ukraine, high inflation drives further interest rate hikes by the Fed, slower economic growth, chip shortages, AI bubble bursts, all the big tech giants start competing more aggressively with each other, wildfires shut down California and/or Texas, US passes aggressive tariffs on China, anti-trust rulings hamper growth of tech companies, debt maturity wall causes massive defaults among smaller companies...
I can be pretty imaginative, and so that list can get really long. But never in a million years would I have come up with "Japan did it." Let alone the more accurate,"Bank of Japan raises interest rates, causing the yen to appreciate rapidly, forcing hedge funds to unwind a $1 trillion YEN/USD carry trade over the span of a week, which puts pressure on stocks due to the massive amount of forced sellers."
TLDR: Japan caused the market crash, and no one would have seen it coming.
As I wrote in this article about election years, the stock market prices shares based upon expectations for those companies. If a risk is widely understood, which it usually is if it's something making headlines, or something that you can come up with based on widely available information, it's usually priced into the market. When a risk is removed, stocks can even have something called a "melt-up" where asset prices rise to reflect lower overall risk (less risk means stocks go up). If anything, the risks you're most worried about will often make the market go up, not down, because some of those worries will fail to materialize causing the stock market to go up as a result. Life is full of beautiful ironies.
By definition, a risk that could actually harm stock valuations is one that no one is expecting. This was the case with the mortgage crisis leading into 08/09, where stocks lost 50% of their value due to widespread mortgage foreclosures and the resulting shortage of liquidity and lending. The entire financial system almost collapsed and maybe 50 people saw it coming. When I went back to re-read the 2007 and 2006 annual reports from Berkshire Hathaway, I didn't get the sense that Warren Buffett foresaw it. In fact, in 2006 he bought Clayton, a manufactured home builder. Not exactly dodging the housing crisis, there, Warren.
Today, meanwhile, everybody worries about a potential crash in the housing market because that is something that they have experienced in the past. It is unlikely that this event, if it occurred, would have half the impact it did back in 2008. The regulatory environment for housing and lending is much more conservative when it was back then, in large part due to regulations passed after it already happened!
Likewise, in January of 2020, there was no one pounding the table about the risks of a global pandemic. That one caught the market by surprise too.
In 2021, almost no one was worried about inflation. Yet higher-than-expected inflation led to higher interest rates which brought the NASDAQ down roughly 30% from its peak.
The problem in predicting a crash is that everyone relies too much on what has already happened, while the inciting event is rarely something anyone has been talking about. Thus, when a client or prospect comes to me and says, "I think X will crash the stock market," I find myself strangely relaxed. Sure, it might cause a crash, but if normal people (not financial professionals) are worried about it, it's probably widely understood, and thus already priced in. Even among savvy investors, most of the things they worry about just never happen.
What I actually worry about in those instances is that something else will cause the crash, and the doomsayer will feel unbelievably smart all of a sudden. Like they were made to be the next big hedge fund manager. "It's so easy! I didn't know that just anyone could do it!"
These people are "right for the wrong reasons." And so I try my best to talk them out of betting their savings on future predictions. While it's pleasant to experience blind luck once in a while, if you want to make money consistently, it helps to have a view of the world that matches reality. What I want to help them avoid is a situation where they were right once (lucky), and then proceed to bet the farm on a series of new predictions which lose them all of what they gained in the first place. The smart ones listen, the dumb ones don't.
My larger point is this, and I hope it brings you some serenity. If something is in the news as a potential "market crasher," either the market has already crashed because of it, or it isn't going to. Most of the things you can think of, the things you worry about when it comes to stocks and investing, just aren't the things driving market performance at the margin. And that's a beautiful rule for peace of mind, "if it's something I can think that could go wrong, it isn't worth worrying about." Conversely, the worst surprises are always surprises, and so you'll have worried about the wrong thing for nothing.
It just isn't worth worrying.
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