Keeping Calm Amid Market Turmoil
It’s hard to remain sanguine when watching the market drop 10% in less than a month, but Zachary Karabell, «investing.businessweek.com»’s chief economist and portfolio manager, is paid to stay calm. And he is calm. He’s watched the recent gyrations of the bourses, and despite the decline, isn’t worried by what he sees.
On the other hand, he’s not expecting the climate to be easy either. Investors still will be facing hazards like further fallout from the subprime mess, rising foreclosures, and uncertainty surrounding leveraged derivatives. According to Karabell, there’s been too much complacency for too long and it could take some time for Wall Street to return to normal.
So, what’s an investor to make of the market turmoil? Karabell took some time amid the volatile doings of the stock market Aug. 16 to share his thoughts with BusinessWeek contributor Ben_Levisohn@businessweek.com. Edited excerpts of their conversation follow:
Why isn’t this the beginning of a bear market?
Fundamentals aren’t pointing in that direction. Earnings are still good. Global growth is extremely solid. These have been good markets and I think they will continue to be. We see a lot of opportunities in the market. We’re looking for the entry point much more than we’re looking for the exit.
What explains the recent downturn?
It’s an important correction in the financial instrument sector. People don’t understand the complexity of all the systems that have developed: quant models, electronic trading, derivatives. It’s been generating a lot of quiet anxiety. But none of that has been tested out in New York and financial capitals. Now it’s being tested. In the past 10 days, it went from where’s the damage, to how much have they infected the whole system. There’s a lack of transparency about the real extent of these issues and people are panicking.
Should they be?
I don’t think there’s ever a time to start panicking. The Dow Jones industrial average was up almost 15%. That’s a lot at midyear. No one was thinking this would be a 30% up year on the Dow or the S&P 500. It was fun when we were up and now it’s not so fun. It’s not like the fundamentals have suddenly deteriorated or even changed that much. Bigger picture, we’re probably a little closer to where we ought to have been. The problem is we didn’t get there in a gradual easy way. But when people are panicking, it’s just not a good time to do much except wait.
You’re not worried that the subprime problems will spill over into the rest of the economy?
Global fundamentals are very strong. It’s not dependent on subprime mortgages in the United States. Is China going to import less iron ore because of a Goldman Sachs («www.businessweek.com») quantitative hedge fund? I don’t think so. You also have to question the assumption that subprime borrowers will drive consumer spending off the face of a cliff. Subrpime borrowers are a small, small part of the consumer market. That’s a low-end consumer who was not, even in the best of times, contributing all that much to consumer spending. If you’re worried about consumer spending, look at jobs and wages—they may not be doing spectacularly, but they’re doing well. That’s what fuels consumer spending.
What would it take to change your mind about the market?
A lot more selling: If you’re aware that panic is out there, you’ll know when there is a stampede you have to pay heed to, whether it’s correct or not. A real systemic crisis: If a big bank fails, I think that would be a reason to stop for a moment and look at what’s going on. But you have to try to separate panic from reality; you have to look at the actual damages, the actual costs.
When does this turmoil end?
At some point it will burn itself out, maybe even today. But let’s see what happens tomorrow.
