ON AND on down. This has become the sort of fall in share prices that people see only two or maybe three times in a lifetime - and for most professionals this is their first experience, for the only previous comparable period in post-war history was the crash at the end of 1974. Only the over-55s had to work through that one.
But as the market keeps falling, the dynamics keep changing. For example, in the past week the whole interest rate outlook has shifted. Six weeks ago the balance of probability was still for the next round of increases coming in August or maybe September, with the probability that the European Central Bank would be the first to move. A week or so ago the probability was that there would be no change in rates either in Europe or the US before October/November. Now there is a strong probability that the next move in rates will be down, not up, with a cut by the US Federal Reserve Board already being priced into the markets.
So there will be a huge amount of liquidity pumped into the world economic system in the coming months. Already money is being pumped in but expect more to come. The danger for the US (though not for the UK as we have more leeway) is that money is already so cheap that further cuts will be ineffective. If one is talking about the price of money that is certainly true, but if one is talking in terms of volume, then there is really no limit to the amount of money that central banks can create. Sooner or later that money will be invested in something. But what and when?
Looking at what is happening now from the perspective of the 1974 crash, there are several points that should be made. One is that markets are likely to overshoot. So the turning point comes later than most people expect and only when they truly despair. The experts are not yet sufficiently humiliated, though the new "D" word, despair, is becoming increasingly quoted.
The second point is that market instability of itself is potentially destructive, though it has yet to prove so. There may simply be a lag here - the fall in wealth will eventually affect consumption, but not yet. Or it may be that the money pumped into the system will offset the fall in stock market wealth in ways we cannot yet fully see. The possibility that falling share prices might destabilise the world economy is so obvious that it may well not happen. It is the surprises that bite you in the backside, not the obvious threats.
A third point is that while a market, viewed as a whole, bottoms on a particular day, individual stocks bottom at different points. I would be very surprised if a solid recovery in share prices were not evident by, say, Christmas, but calling both the depth of the bottom and the timing is impossible. On the other hand there may well be some shares that are bottoming out now, while for others the descent may continue while the rest of the market is climbing.
Even if the ultra-pessimists prove right and the share indices move sideways for 10 years, there could still be great investment opportunities. Some companies will prosper even in tough times. As for the end of equities as a sensible investment - well that is what everyone said at the end of 1974, to be proved absolutely wrong.
Still, it is important to see the present market in a long historical context, for just because something has fallen in price does not mean it is cheap: it may simply have been far too expensive before and be rather too expen- sive now. …