The global stock market dive that began in January and picked up steam this month is a major development — both because of its causes and its consequences.
Nobody knows why it happens, but the historical evidence is clearcut: in almost every major stock-exchange crash, London leads New York into the abyss. So it is this time, too.
The Brits left it rather late. The FTSE100, the primary share index on the London Stock Exchange, registered its peak closing level on January 12, just short of 7,800. Two weeks later, the Dow Jones Industrials and the S&P500 put in their respective highs, at 26,616 and 2,873, before embarking on a sharp plunge that reached around 12% by the time they hit bottom on February 8-9.
The subsequent rally, which continued through February and peaked on March 12-13, was sufficiently spirited to persuade many analysts that what had happened in late January/early February was no more than a much-needed ‘correction.’ The market, having risen steadily and almost without pause since the night of Trump’s election (November 8, 2016), was merely catching its breath. Some people no doubt wanted to get off the train, but many others wanted to get on and this temporary setback provided the opportunity to do so.
The optimists were encouraged in their benign assessment by the fact that the Nasdaq Composite Index, reflecting the more technology-oriented and hence more speculative Nasdaq market, did indeed manage what its senior sisters could not, namely to register a new record closing high, on March 12.
Signals, false and true
Unfortunately, that proved to be a false signal, because the very next day the Nasdaq Composite, despite a strong opening and upward surge, turned round in the course of the trading day and dropped, ending below the levels of the previous day. This reversal triggered warning lights for any and every technical analyst, irrespective of the specific technical ‘system’ they used. And this signal was not false; rather, it proved entirely accurate.
In the nine trading days beginning March 13, equity markets around the world have fallen sharply, with the decline intensifying steadily, so that the last two days — Thursday and Friday, March 22nd and 23rd — were the worst to date. The American markets, at least, still offer a seeming consolation in that this latest slump has not yet taken the share indices below their lows of February 8-9, but the fact that the FTSE in London did plunge through its parallel low levels from February strongly suggests that any such hope is illusory.
Indeed, the discussion among leading analysts in the US this weekend — including, remarkably, some important figures from mainstream institutions — is not focused on whether a rebound, or even a halt, is on the cards. Rather, the openly-expressed fear is of a massive selling climax, perhaps even on the scale of ‘Black Monday’ in October, 1987, when the markets fell an unprecedented (and so far never-repeated) 20-25% in a single trading session.
It’s not them, it’s us
The understandable reaction of most people to all this talk of stock market crashes is that it is of limited — if any — relevance to them. They do not ‘play’ the markets, their investment activity is focused on safe and solid assets and the rest is just meaningless jargon which becomes background noise.
Very sadly, this view is incorrect, not to say totally wrong.
Virtually everyone in the developed world is deeply invested in the financial markets, if only via their pension savings, which for most people represent their largest and most important financial asset. Pension funds everywhere are heavily invested in equities and are therefore exposed to significant losses from any major falls. Of course, these come after years — an entire decade, since the previous crisis — of strong gains, but for most savers that perspective will not make the blow less painful.
To make matters far worse, this market crisis — which we are probably only in the early stages thereof — will encompass the supposedly safe and solid bond market, as well as that of shares. The rise in interest rates over the last year or two, from historically unprecedented low levels in all developed economies, is one of the key factors — some would say the most important one — responsible for the long bull market in equities finally giving way to a bear market.
Describing the process by which a market crash, whether in shares or bonds or both, will feed through to the real economy — i.e. production, jobs, consumer demand — will take too much space and, at this juncture, is premature. One example, however, will suffice to make several essential points.
The FANG gang
All share prices are overvalued by almost every accepted measurement. However, technology shares are especially overvalued. The afore-mentioned Nasdaq index has come to be dominated by the ‘FANG’ or ‘FAANG’ group of companies: Facebook, Amazon, Netflix and Google, with Apple an associate member.
These are mega-firms with huge revenues and (in some cases) massive profits — not start-ups based on dreams and ‘vision.’ But their share prices are nevertheless absurdly high. Now, suddenly and for reasons that don’t concern us here, Facebook is under severe attack and facing potentially existential dangers.
If Facebook, or any of the other FAANG gang, suffers a major crisis, they will all be impacted: the bubble of wishful thinking supporting their bloated share prices will be punctured. The ensuing price collapse will encompass the entire Nasdaq market and will terminate the tremendous boom in technology shares of recent years.
The seemingly endless flow of money ready to pay virtually any price for whatever is considered hot — ‘blockchain’ is the latest fad — will abruptly evaporate. High-tech, from Silicon Valley to Herzliya Pituach, will tumble out of the clouds of make-believe to a hard landing on the harsh realities of cash flow, customers and genuine profits — or their absence.
The shortages of qualified people, the readiness to pay astronomic salaries and the appetite for more and fancier office space that currently characterise Israeli high-tech will disappear, seemingly overnight. It has happened before, at least four times and there is every reason to believe that this, too, shall pass. But not before it has expunged vast amounts of phoney investment and eviscerated very many companies.
A “tech-wreck” similar to that of 2000 is very likely. But, thanks to political paralysis and poor policies, it will only be part of a much wider debacle. Irrespective of whether this coming week sees a collapse or a calming down, the critical need is to realise that the party is over and to start preparing for a very different environment — not just in finance and business, but also in society and politics.