Markets are Stabalising now

Touch wood, but I note that markets are stabalising now. Especially since the price of gold has plummeted from its highs of well over 1800 USD per ounce, I view this as an indication that people are no longer quite as panicky as they were the last few weeks. I don’t like to guess whether we are already at the bottom or not, because it is almost impossible to get the exact day. Nevertheless, we are probably quite close.

The reason why I think we are quite close is because we already started from a relatively low base this year. Its not like markets had been in a bull run for several years (like in 2008), markets were already quite cautious and grappling with various concerns like a double dip recession, the European financial debt crisis and China inflation since last year. Also, there isn’t a property bubble this time round in western countries to burst, that already happened during the Lehman Brother crisis. Companies have mostly been quite conservative, and prudent since the global recession and earnings have actually been quite robust.

Thus, I believe that the 15 to 20% selloff since the highs this year is already plenty and to a certain extent, I think there has been a little too much selling already. If we look back at history, usually the big market crashes which are 30% or more coincide with major recessions or bursting of huge asset bubbles (whether in technology stocks like in 1999, or in the property and financial sectors in 2008). This time though, you would be hard pressed to say that anything is in a bubble at this point, unless that asset is called gold. Just about everything else has sold off substantially this year, even other commodities other than gold!). The crashes resulting in huge selloffs in western markets of over 30% included momentous events like World War 2 (S&P 500 down 60% over 5 years), the Technology bubble bursting, the 1^st oil shock, the great depression, and just relatively recently, the Lehman Brothers crisis followed by the global recession. We would have to be facing another equally momentous kind of crisis for a similarly major market crash to happen now (and barely over 2 years we bottomed out from the last global recession).

Some point to the Euro debt crisis as this possible other event. I believe that the current Euro crisis is a bit overblown to a certain extent. Regardless or not whether the Euro will stay in its current form, or whether or not the Southern Europe countries like Greece, etc default and have to get their debt restructured, those are temporary shocks. Good companies in Europe will continue to produce goods and services which people value and they value will remain. A default and subsequent debt restructuring is actually not the end of the world. Many countries in the past have gone through debt restructuring and the world has continued to move on. Europe, with its hundreds of millions of people, isn’t going to magically disappear off the face of the earth just because some of the weaker countries have overspent and now have to face the music for their overspending. So, keep a cool head, now is the time to look for some bargains and not the time to panic.