If ever investors needed a reminder to stay humble, this week provided it. It saw the second anniversary of one of history’s great relief rallies, which has seen stocks double in two years. But it brought alarm about the Middle East and about the eurozone, fears that the market rally might carry the seeds of its own destruction – and then on Friday the appalling news from Japan.
Even before the earthquake, one legendary investor, Bill Gross of Pimco, was scaring markets by announcing that he had sold all his US Treasury bonds, while another great investor, Carl Icahn, was giving his investors’ money back. “While we are not forecasting another market dislocation,” he said, “this possibility cannot be dismissed. Given the rapid market run-up over the past two years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis.”
How great is that risk? The earthquake need not increase the risk of a true market crash. Such events have more to do with the previous behaviour of the market than they do with events in the real world surrounding them. The Wall Street Crash of 1929, the Black Monday Crash of 1987, and the collapses of the Tokyo stock market in 1990 and of the US Nasdaq in 2000, all started with little or no trigger from the real world. The common theme was that markets had grown wildly overvalued.