John Manley

Nasty, brutish, and short

AdvantageVoice® Blog—6-24-13
John Manley, CFA, Chief Equity Strategist

Last week, the equity market wiped out almost two month of gains in two days. The air was thick with the smell of fear and risk; the culprits were the usual suspects.

Perhaps the International Monetary Fund would not lend to Greece because of a 3 to 4 billion euro shortfall in the Greek budget (“a billion here and a billion there and, pretty soon, you are talking about real money”). Perhaps the central bank of China would let its banking system collapse like so many dominoes while it sat on the sidelines and ignored the lessons of Lehman Brothers. Most important, the chairman of the U.S. Federal Reserve (Fed) expressed greater confidence in the ability of the American economy without the regular infusion of massive amounts of liquidity. Although the possible withdrawal of the infusions was couched in extremely conditional terms, the market immediately saw the risk of an unfriendly Fed and reacted accordingly.

I know that I am being a bit perverse, but I think that it is a good sign that we can still get scared so easily and quickly. To me, it is yet another sign that the wall of worry the market has climbed in the past six months is still largely intact.

I do not mean to play down the potential problems that I outlined above. China will always be “a riddle, wrapped in a mystery, inside an enigma” to me, and I am well aware of the stresses on its financial system. I am aware also of the Herculean task facing the Greeks as they attempt to satisfy both their creditors and their electorate. I am also very, very, very much aware that the Fed will have to begin to end quantitative easing at some time in the not too distant future (at least I hope they will—an economy that will not reignite is not a happy prospect).

Having said all of that, I think it is time for a reality check. Ask yourself, do you really think that:

  1.  China, with all of its wealth, will allow a liquidity crisis to destroy its banking system?
  2.  The euro will fail because of a shortfall in the Greek deficit of a few billion euros?
  3.  Ben Bernanke is unaware of the risk of premature tightening or even the perception of premature tightening?

I know that I am the one who sounds cynical now. It’s just that bull markets seem to follow certain patterns, in my opinion. Bull markets tend to rise slowly as investors claw their way through doubt and uncertainty. Corrections in bull markets tend to be big and loud with underlying skepticism providing ample fuel for the move.

I was taught that bull market corrections are like Thomas Hobbes’ description of the natural state of mankind: “nasty, brutish, and short.” So far, we have had two out of three. Given the reasons for last week’s retreat, I suspect that we will soon have the third.

The views expressed are as of 6-24-13 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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