Why stock market investing today is like flying in the 1950s

global polarisation, Federal Reserve, a big spike, inflation, Benoit Mandelbrot, US-China relations, is critical

Most stock markets indices don’t want to go down. For a Hong Kong dollar investor, Mumbai is up 111 per cent since the Covid-19 low, the S&P 500 is up 103 per cent, Europe 89 per cent, and Tokyo 73 per cent.

But, as they say in football, it has been a game of two halves. The Shanghai and Hong Kong stock markets have seen a relatively derisory rise of 45 and 22 per cent respectively, making them among the few markets not to exceed their pre-Covid-19 highs.

The bold moves elsewhere are driven by a reported US$17 trillion of liquidity in spender’s pockets, and the continuing promise of ultra-low interest rates. It is unsurprising that wealth management clients are borrowing more than ever – a recipe for inflating prices.

It means that investing today is like flying in an plane in the 1950s – long periods of intense boredom separated by short periods of sheer terror. The chart below shows the Vix index, sometimes described as the “fear index” as it measures the market’s expectations of the relative strength of near-term price changes of the S&P 500 index.

The chart shows the Vix from the beginning of 2020; the volatility surge in February of last year, as the market collapsed on the initial Covid-19 fears, is obvious.

Since then, the index has broadly declined to a low of 17, which is even below its 30-year average of 19.5. More important is to notice the periodic spikes when volatility leaps during periods of market distress.

global polarisation, Federal Reserve, a big spike, inflation, Benoit Mandelbrot, US-China relations, is critical

These are times when the elephants in the room – money printing, global polarisation, inflation, the US Federal Reserve and sluggish growth – raise their bearish heads (if I am allowed to mix my menagerie).

These factors periodically shock the markets, even as the overall volatility of the market has declined. The European and the Hong Kong versions of the Vix follow a similar pattern of temporary spikes – this week, Hong Kong unsurprisingly displayed a big spike of its own.

Markets favour a steady state, where prices stay on trend for much longer that we analysts like to forecast, as demonstrated by the periods of stability between the spikes. This indicates that – Greater China aside – the crawling climb of the market to higher levels will probably continue, interspersed by times of doubt when prices come off sharply.

It is no secret that these steady periods usually end with a major shock – an “unknown unknown” that will arise, for instance, if the market suddenly fears that the Fed can no longer control rising inflation.

global polarisation, Federal Reserve, a big spike, inflation, Benoit Mandelbrot, US-China relations, is critical

Federal Reserve chair Jerome Powell testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington on July 15. At its most recent meeting, the Fed Open Market Committee decided not to raise interest rates from near zero nor slow its bond-buying programme. Photo: Reuters

Those physicists who have ventured into finance, such as Benoit Mandelbrot and Didier Sornette, tend to have the best handle on this kind of critical market situation, which can be compared to the phase changes of ice turning into water and then into steam.

Physicists are more comfortable than financiers with the concepts of power relationships, “fat tails” and “black swans” – which look at the likelihood of unexpected events – and “dragon kings”, which study normal events that become abnormal.

Physicists can often tell us when the market is looking critical by using mathematical formulas and modelling – but even they don’t have a strong track record of predicting exactly when that steady state is going to break down.

At present, markets look reasonably stable. The “Fed pivot” was well timed, in terms of flagging rising interest rates in advance and, in any case, the estimates by the rate-setting members of the Fed are still a long way off – with the first rises in 2023 or 2024.

Even the clear and present decline in US-China relations is unlikely to knock the recovery off course. The political world will continue to be polarised – yet, paradoxically, the economic world will part much less.

Trade between China and the West at the grass-roots level will continue apace as they both need each other, even as relations worsen. Trade is critical to all sides, even if there is significant disruption. Supply chains will adjust. That row is pretty well discounted by the markets already.

As economies adapt, there are considerable differences within those broad observations. It was a shock to walk down Holborn in Central London this week where I used to walk 40 years ago to the London School of Economics.

The long rows of shops with familiar names now dark and shuttered are a clear demonstration of the disruption of Main Street by e-commerce. So, too, are the swathes of British farmland now growing houses or monstrous facilitation sheds for the new breed of online retailers.

Retail and residential are moving from the city to the country alike – not helped by old-time planners banning traffic from city centres. Covid-19 has accelerated and amplified existing trends, causing both recession and growth even within the same economies.

Minor victories in the battle between the two will continue to cause both stability and periodic volatility in markets that will persist until we have the kind of phase change familiar to physicists. For now, we are likely to experience the 1950s flying experience for some time yet.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness

News Related

OTHER NEWS

Astonishment at the agent's closure of Waku Waku: ‘Everything in me screams: not this'

viral messageThe notorious closure of the Utrecht restaurant Waku Waku is also causing great surprise among enforcers. Pim Vos, community officer in Vught in Brabant, writes off the frustration in ... Read more »

S&P revises Russian GDP growth forecast to 4% in 2021

The unemployment rate in Russia is expected to be 4.9% this year Read more »

Railway traffic in Guinea restored, operations are normal — Rusal

It was reported that on September 20, two trains carrying Rusal’s bauxites had collided Read more »

Facebook requests Moscow court postpone fine payment

Earlier, the Justice of the Peace Court of the Tagansky District slapped the company with fines amounting to 26 mln rubles over the tech giant’s refusal to remove prohibited content Read more »

Unvaccinated United Airlines' staff faces firings as early as today as deadline for Covid shots passes

United Airlines pilot Steve Lindland receives a COVID-19 vaccine from RN Sandra Manella at United's onsite clinic at O'Hare International Airport on March 09, 2021 in Chicago, Illinois.Scott Olson | ... Read more »

Nagaland govt announces Unlock-7 from Oct 1 to 30

Representative image The Nagaland government Tuesday decided to extend its latest phase of unlocking till October 31 with more relaxations, officials said. The state government has been announcing the unlocking ... Read more »

Viacom18 bags broadcast and digital rights for football league Italian Serie A

Voot Announces 17 New Originals, International Expansion … NDTV Gadgets Voot Announces 17 New Originals, International Expansion Viacom18 announced that it has acquired the broadcast and digital rights for football ... Read more »

OPEC forecasts oil demand rebound before post-2035 plateau

Representational image. Source: Reuters Demand for oil will grow sharply in the next few years as the global economy recovers from the pandemic, OPEC said on September 28, adding that ... Read more »

Aditya Birla Sun Life AMC mobilises Rs 789 crore from anchor investors ahead of IPO

Representative image Aditya Birla Sun Life AMC, one of the four largest AMCs in India by quarterly average assets under management, has mopped up Rs 788.95 crore from 50 anchor ... Read more »

S&P Dow Jones brings bitcoin, ethereum to Wall St with cryptocurrency indexes

Cryptocurrency (Representative image: Reuters) The S&P Dow Jones Indices launched new cryptocurrency indexes, it said on Tuesday, further mainstreaming digital currencies including bitcoin and ethereum by bringing them to the ... Read more »

Dow sheds 500 points as weakness in Big Tech leads stocks lower

Stocks fell broadly on Wall Street Tuesday as bond yields continued marching higher and put more pressure on big technology companies. The Dow Jones Industrial Average fell 500 points, or ... Read more »

Star Housing Finance's loan book hits Rs 100 crore so far this fiscal

Representative Image Affordable housing-focussed Star Housing Finance Ltd (Star HFL) on Tuesday said its loan book has reached Rs 100 crore during the current fiscal year so far. Star Housing ... Read more »

PVR to reopen multiplex PVR Saket with release of James Bond venture 'No Time To Die'

Multiplex operator PVR announced the reopening of its flagship multiplex property PVR Saket on September 30 with the release of the much-awaited James Bond venture— No Tim To Die. Considered ... Read more »

SEBI allows open offer and delisting together at differential pricing to make M&As easier

The SEBI board made it easy for acquirers to delist target companies after acquisition. The board of the market regulator, the Securities & Exchange Board of India (SEBI), has eased ... Read more »

China power crisis: thermal coal inventory nears record low as country suffers worst outages in a decade

In past years, when the calendar turned to September, China’s power-generation groups set out to replenish their coal inventories ahead of the cold winter months. This year, coal is so ... Read more »

States debt to hit Rs 71.4 lakh crore in FY22: Report

Representative image (Source: ShutterStock) States’ indebtedness will remain high this fiscal at 33 per cent, which is only a notch below the record high of 34 per cent of their ... Read more »

Kayak Investments to sell 6.57% stake in Max Healthcare, base deal size Rs 2,220 crore

Max Healthcare Institute Kayak Investments Holdings Private Ltd, one of the promoting entities of Max Healthcare Institute Ltd, will sell its 6.57 percent stake in the company, CNBC TV 18 ... Read more »

VRO Hospitality raises $3 million in Series-A funding round

Representative image. Bengaluru-based hospitality chain VRO Hospitality on Tuesday said it has raised $3 million (about Rs 22.5 crore) in Series-A funding. The funding was a mix of equity and ... Read more »

Suryoday Small Finance Bank to discontinue ATM services from October 1

As of June 30, Suryoday SFB had a total of 555 banking outlets of which liability-focused outlets were 97 and the total employee count stood at 5,072 as of June ... Read more »

Jaypee Infratech case: NCLT to hear plea on approval of Suraksha's bid on October 26

The National Company Law Tribunal (NCLT) on September 28 decided to hear the pleas for the approval of the Suraksha Group’s bid to acquire embattled real estate firm Jaypee Infratech ... Read more »

Sen. Warren calls Fed Chair Powell a 'dangerous man,' says she will oppose his renomination

“Your record gives me grave concerns. Over and over, you have acted to make our banking system less safe,” Warren said. Read more »

U.S. Senate's Warren calls Powell 'dangerous man' to lead the Fed

FILE PHOTO: Senator Elizabeth Warren speaks with the press on Capitol Hill in Washington (Reuters) – A top Senate Democrat on Tuesday said she would vote against a reappointment of ... Read more »

Rescue drone taking off from water developed in Russia

A drone is fully equipped with a sealed screw-motor group to work in the Arctic as well as in countries of Africa and the Middle East Read more »

Erdogan greift Discounter-Ketten wegen steigender Preise an — dabei liegt die Ursache nicht bei den Märkten

Die Türkei hat seit Jahren mit der steigenden Inflation im Land zu kämpfen. Vor allem die Lebensmittelpreise sind betroffen. Die türkische Regierung untersucht nun die Preissetzung der fünf größten Supermarktketten ... Read more »

Tech firms should not use encryption as excuse to hold up assistance to law enforcement: MeitY Secy

How to encrypt your hard drive and keep your folders and files safe Softonic Technology companies should not hold up assistance to law enforcement agencies by using encryption as an excuse, ... Read more »

SEBI board clears gold exchange framework, revises norms for RPTs, superior voting rights, delisting and M&A — Key takeaways

The SEBI board made it easy for acquirers to delist target companies after acquisition. The board of the markets regulator Securities and Exchange Board of India (SEBI) took a number ... Read more »

Govt extends foreign trade policy till March next year

Representative image The government on Tuesday again extended the existing foreign trade policy (FTP) for another six months till March 31 next year, according to a notification. Earlier, it had ... Read more »

Job creation and hiring in trade, hospitality to improve from 2022: Experts

Representative image of hotel lobby. Economists and sector experts are of the opinion that hiring and employment in trade and hospitality sectors are expected to improve from the third quarter. All but ... Read more »

Gas prices in Europe plunge to $970 per 1,000 cubic meters

Earlier, October futures at the TTF hub in the Netherlands climbed to record-breaking $1,040 per 1,000 cubic meters Read more »

IMF: economy has emerged from crisis well, more effort required for schools, housing, climate

Compared to other euro countries, the Dutch economy has come through the corona pandemic well. This morning the Central Planning Bureau (CPB) already concluded that the Netherlands has come through ... Read more »

Minister Grapperhaus misinformed Parliament about fraud at Pels Rijcken

Outgoing minister Ferd Grapperhaus (Justice and Security, CDA) has misinformed the House of Representatives about his knowledge of the extensive fraud at state lawyer Pels Rijcken. Contrary to what he ... Read more »

Fed Chair Powell warns Congress that inflation could stay high for months

Federal Reserve Chairman Jerome Powell said that the US should continue to expect high inflation for the coming months due to COVID-19. AP Photo/Jose Luis Magana, File Federal Reserve Chairman ... Read more »

Requests for gas supplies to Europe met in full, Gazprom says

Earlier on Tuesday, the gas price was for the first time above $1,000 per thousand cubic meters at the opening of the trading session in Europe Read more »

Ericsson's China chief remains hopeful on prospects in the country despite rising geopolitical tensions over 5G

Ericsson’s China chief said the Swedish telecoms equipment giant’s operations in the country have been affected by geopolitical tensions after Sweden banned equipment made by Huawei Technologies Co from its ... Read more »

Action will be taken if there are violations, says SEBI chief Ajay Tyagi; declines to comment on Zee matter

SEBI Chairman Ajay Tyagi SEBI Chairman Ajay Tyagi on Tuesday said that whatever actions are required will be taken if there are violations but declined to offer any specific comment to ... Read more »

Nasdaq tumbles 2%, S&P 500 drops 1% ahead of Jerome Powell, Janet Yellen hearing

Source: Reuters Wall Street stocks fell early Tuesday with tech shares hit hard as Treasury Secretary Janet Yellen urged Congress to quickly raise the debt ceiling to keep the US ... Read more »

Waaree Energies files draft papers for IPO with fresh issue worth Rs 1,350 crore

Solar energy player Waaree Energies has filed draft papers for its initial public offering that comprises a fresh issue of Rs 1,350 crore and an offer for sale. The offer for ... Read more »

SEBI's investor charter to go live, to lay down investors' rights

The investor charter that was proposed in Union Budget 2021-2022 with the aim of protecting investors from the misselling of financial products, was cleared for launch by the SEBI in ... Read more »

Hungary cleared Gazprom contract details with European Commission, says Russian envoy

On Monday, Hungary signed a new, long-term contract with Gazprom to supply gas bypassing Ukraine Read more »

Tech companies sharply lower on Wall Street

Stock markets in New York started trading with losses on Tuesday. Tech companies, in particular, went on sale. Interest rates are rising, making these equities, which are valued primarily on ... Read more »