There is a compelling history of markets in the summer causing havoc with summer vacations…think 1997 Russian debt crisis and LTCM, 2007 the mortgage securities and money market freeze, 2008 Fannie Mae jolt that led to the Lehman crisis. Could this summer be similar? Well, if Gillian Tett of the FT is right, we have the makings of a summer replay. As Ms. Tett notes summer markets tend to be thin and with senior hands away, markets can go completely haywire if things go wrong. Last summer, markets were severely spooked by the U.S. debt ceiling drama and the eurozone crisis.
What could this summer portend? Just days ago, eurozone central banks have dropped their rates to help rescue Spain and Italy. Any new banking stress and investors will panic. While U.S. investors have been watching the Euro crisis unfold, the polarization of American politics continues with no debt deal on the horizon – a looming report from Paul Volker and Dick Ravitch is likely to be shocking. The Chinese slowdown is as murky as the U.S. mortgage sector was in 2006 with unknown outcomes despite investors girding for sub – eight per cent GDP growth. The Libor scandal continues to unfold spawning negative sentiment towards the financial sector. Whether it makes it way to the U.S. and banks are cited for collusion is anyone’s guess but it cannot be good for liquidity and credibility as settlements unfold; and the Olympics in London have the British government cancelling the Gilts auction and foreign exchange markets operating out of traders’ backyards and possibly pubs as part of the City is shut down for the games. And the Middle East is always out there just waiting to explode.
What can turn into mayhem also creates opportunity and sometimes very unique ones. Cold hearted analysis is likely to be an essential but scarce commodity in a sea of emotion. It’s been said that when you should be buying stocks, you won’t want to. That’s why MarketGrader.com is so useful. As prices tumble, value is created. The trick is to find companies with sound fundamentals when all companies look cheap. In such circumstances, fundamental analysis will be the main determinate for making good investment decisions.
And it’s only July 6th.