Michael Lipper: the logic behind the 'wall of worry'
In this week's blog, the veteran investor assesses risk concerns and questions the spirit of integrity in global markets.
by Michael Lipper on Feb 18, 2013 at 09:25
During a stock market phase when stock prices rise and conventional thinking suggests that the economy is in weak shape, pundits may explain that the market is climbing a “Wall of Worries.”
Another way to phrase this phenomenon is that market prices are narrowing their discount of future better prices. After all, the market for future dividends and earnings is what today’s prices are meant to be about.
Since the break in 2008, many of the markets around the world have been assessing the chances of further declines due to potentially large financial failures, deep economic recessions (some said depressions) and political turmoil.
These are challenges that make governing difficult to impossible and inhibit the ability to address the long-term structural deficits facing many “developed” societies.
Five years after the markets’ bottoms, on the surface we have experienced no major financial failures in part due to the shifting of financial leverage from the private and commercial sectors to the government sector.
This feat of legerdemain was done by artificially lowering interest rates by ignoring credit concerns. Removing the impact of deleveraged debt from the surface economy reduced the strains on the economy.
In addition, a number of the major governments went through an election which did not produce panic selling by disappointed investors.
In the mind of investors, institutions and individuals, if market prices didn’t go down, they should go up. One rationally might disagree with this “logic,” but in truth that is what happened.
If the old worries did not cause a double or triple dip in market prices, then as one comic book character queried years ago, “What me worry?”
As a professional investor that is exactly why I am getting a bit concerned. In my most conservative accounts that enjoyed a good 2012 (and 2013 looks positive), I am beginning to address our stock/bond ratios.
Stocks have done well and they now account for way above normal asset class guidelines as a per cent of the total accounts.
The concern is that when the periodic declines hit the stock market, potential gains from fixed income holdings will not be large enough to hold the value of the account to a comfortable level.
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