Equity markets crash…buy!

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Stock markets around the world are tumbling (at one point today, the FTSE was down 5.71%, the biggest one-day fall in six years) , reminding us that asset prices tend to fall faster than they rise. The reasons for this crisis seem clear: inflation has picked up, economic growth is easing, the fiscal stimulus package announced by Bush appears insufficient, and significant interest rate cuts from the Fed are already priced in. There is very little further wiggle room for policy makers. Against this toxic, stagflationary backdrop, it’s understandable why investors are nervous.

However, we also know that economies and markets tend to self-correct over time – as prices change and agents respond – with new, unpredictable events and themes taking hold as the years go by. My problem is that markets do not seem to be very forward looking when it comes to pricing in the unknowable. They can be forgiven because not only does uncertainty multiply exponentially the further forward we move in time, but we are also faced with the fundamental question of how to price something that is unknown and so can’t be measured!

Nevertheless, I feel that markets are underpricing the risk that something will occur which will provide some degree of offset to the current gloomy outlook. I don’t know what it is, but that doesn’t concern me one bit. All I know is that a lot of downside seems to be in the price. Equity prices may well fall in coming weeks. However, because the market can’t see a way out of the current mess I believe it may be a good time to start loading up on equities for the long-term. Broadly speaking, good times are followed by bad and bad by good, but the market tends to rise over the long term.

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