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Portfolio > ETFs > Broad Market

Defying Gravity

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I’m writing this a couple of days after panic-selling started in Shanghai and hit the Dow with a tidal wave that sent it sliding 416 points, or 3.3%, when the day was over. The NASDAQ and S&P 500 also took similar lickings, dropping 3.86% and 3.47%, respectively.

It’s been a while since the equity markets took such a steep one-day nosedive. Indeed, one of the main features of the last few years’ improbable buoyancy has been how relatively little volatility the markets have experienced (although for some people it was still too much).

So there seemed to be little panic this time and more of an expectation that the market would immediately turn around and do a pendulum swing the next day way back in the other direction.

Didn’t happen.

At least it didn’t happen with the kind of oomph that many investors were hoping for and that many pundits were expecting. The Dow, for instance, managed only a 52-point rise on the day following The Big Drop. More of a hiccup than a full-bodied pendulum swing.

If it takes a while for the Dow and the other averages to regain the ground they lost, I wonder how consumers will react.

The lack of volatility has had a lulling effect on many investors who once again started to believe that the stock market was an anti-gravity mechanism. So, in the sense that an occasional big sell-off like this acts as a wakeup call to the reality of the market’s ups and downs, that is a good thing.

It’s not such a good thing when you check your 401(k) or IRA balances online and find out that you’ve taken a hit to the tune of a few thousand bucks. And the shorter the timeframe is for your retirement, the less of a good thing this is.

If you’re a small investor or do most of your saving/investing through mutual funds, you want to believe in the market’s unfailing instinct to rise and in the advice that equities are the place to be over the long haul, despite the inevitable dips.

But there is still that nagging feeling as a small investor that the situation is basically out of your control and someone else–someone with a lot of money–is calling the shots or getting out early or knows something way before you do.

The accounts of many people who were burned the last time the market dived and stayed down for a while (when the tech bubble burst) are still trying to get back to where they were in that heyday. For these people, getting burnt is not a memory but something with which they’re still struggling.

And these people, dear readers, are the ones who buying all those variable annuities with guarantees that look like a bowl of alphabet soup: the GMWBs, the GMABs, the GMIBs.

They’re you and me–all of us who lust for the nice returns equities can bring but who really don’t want to feel the sting when equities decide to quit defying gravity. And the nice thing for variable annuity insurers is that we’re willing to pay for the comfort these alphabetic benefits bring.

Looked at in one way, what all these buyers have done is taken their faith in the market and moved it over to faith in the insurance companies from which they’re purchasing gobs of annuities.

Now they just have to hope this faith is justified and the insurance companies that are guaranteeing their protection know what they are doing. It’ll be a bummer for everyone involved if they don’t.

Steve Piontek



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