Chill

Seems like a fine day to briefly replay one of my life lessons.

Thirty-something me was business editor and daily columnist for a major Toronto newspaper. One fine October morning the market crashed. The Dow Jones machine in my office (it printed news on a long roll of paper and rang a bell when anything important happened) went nuts.

It was a Monday in 1987 and things moved from catastrophic to historic. By the end of the trading day the Dow had shed more than 22% of its value. That eclipsed the 1929 crash which heralded the Great Depression. My little office was packed and steamy with bodies as I pounded out the front-page story. We’re pooched, it said.

The next morning – in an epic example of drama, media hyperbole and irresponsibility – I ran pictures of sad, unemployed men lined up outside a soup kitchen on Yonge Street in 1932. That sold a lot of papers. I regret it still.

So what happened?

The market recovered, of course. Central banks moved in to chop rates. Regulators installed circuit breakers to prevent more emotional freefalls. Leaders reassured. And investors who didn’t panic and run used their cash to scoop up good companies at ridiculous prices. A few months later, losses were gone.

Black Monday was an extreme event, but not singular. I watched more crashes come and go. The dot-com meltdown. Y2K. Nine Eleven. The Asian contagion. The credit crisis. Covid. Along the way were wars, assassinations, weather bombs, recessions and political upheavals. The Internet got invented. There were 19% mortgages. A cavalcade of change.

So this morning, more.

Overnight the Japanese market shed 12% (its central bank just made a big mistake). The Mag 7 stocks all laid eggs when trading began in North America. Bitcoin lost $7,000 a unit. Gold tanked. Bond yields took a dive and bond prices roared. The S&P, Dow and Nasdaq in the States all tumbled. The VIX – a measure of volatility sometimes called the fear index – spiked from 15 (normal) to over 65 (‘we’re all gonna die…’). Oil and other commodities fell hard. Bay Street gave up 500 points.

Traders started talking about the Fed making an emergency interest rate cut (highly doubtful), as the odds of central bank intervention grew quickly. Suddenly nobody was too worried about the recent inflation numbers and became far more concerned a soft landing was turning into a hard one, that CBs had kept rates too high for too long and the US economy was more prone to turn recessionary.

All that’s possible, of course. But more salient was the fact investors had pushed the S&P to more than 30 new record highs in the past seven months, that stocks like Nvidia had gone ballistic with growth of close to 200%, that Bitcoin was propelled into the ether, that tech stuff was priced for endless growth and Wall Streeters were ignoring toxic American election, Netanyahu going rogue, the tragedy of Ukraine, global polarization of politics, the financial costs of climate change and, of course, the bottomless pit of private and public debt.

Do we have problems? You bet. Are they terminal? Nah.

“This is not an economy tracking a recession versus a soft landing,” cautions Scotia’s level-headed economist, Derek Holt. “Markets have assumed a recession lies right around the corner and economists have under-predicted growth in the US economy for ages now and been wrong in serial fashion while spending each quarter chasing the numbers higher over and over again.”

He’s right. GDP is still expanding. Corporate profits are up 11% year/year. Unemployment is contained. And everybody knows the cost of money will be coming down in the US next month as is already happening in Canada. Consumers may be tapped out, but incomes continue to rise faster than inflation, which has itself been reduced from a torrent to a trickle.

We may have a recession (the last one was in 2020 – did you notice?), and markets go sideways (after a recovery) until after the November vote and its immediate consequences. We’re certainly in a period of volatility, as we warned you would be the case in the second half of 2024.

But these are not the end days.

Unless, of course, you lack perspective. Understanding. Experience. Then you make mistakes.

I know.