Following a choppy third quarter, global markets have made a comeback. Since October 1, the S&P 500 and EAFE have both rebounded over 5%, and emerging markets have bounced by more than 8%.
Strangely enough, the same fears that stoked the sell-off also seem to be fueling the rally. Investors who disliked the uncertainty of Yellen’s September rate announcement, now see her decision to postpone as market supportive. Likewise, the fears about weakness in China are now giving way to to the view that the US has limited direct exposure to the Chinese economy, to begin with.
In reality, underlying fundamentals have not changed since September. All that has really changed is investor sentiment. This reminds us of a famous saying attributed to the legendary investor Ben Graham. It goes something like in the short run the market is a voting machine, but in the long run, it is a weighing machine.
Over long periods of time, fundamental factors like intrinsic value will drive price. However, from day to day investor psychology drives price more than anything. Given the volatility we’ve seen this year with limited fundamental changes, I’d say the market looks to be in full-swing voting mode.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.