Why are Western stocks down more than those in Asia?
Stock markets in some countries have shown signs of recovery early, while others still struggle. What accounts for the difference in market recovery around the world? Larry Swedroe explains.
Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today thought leader Larry Swedroe is with us, Buckingham’s Chief Research Officer and Larry, why are Western stocks down 35% when Shanghai and the Hang Seng Index are only down 15%?
Yeah, well we can try and answer that question Tim, by coming up with a narrative that makes sense, we can’t know with certainty why that happened. But I think this one is my explanation and it seems quite logical to me. The stock markets that have rebounded the fastest are what I would call command and control economies. You’re in China, they know where you are by your cell phone and if you’re crossing the street and you’re out doing something you shouldn’t be doing, they know where you are. They can lock down and throw you in jail if you violate going out of the house and you’re not allowed to. Singapore, South Korea, Asian economies, population, their society’s a much more used to obeying the rules and having restrictions on people’s actions. Western economies tend to be much more open and free, and so the idea might be that in these Far Eastern markets they, the market expects them to be able to control this contagion and prevent it from spreading in a much faster manner than we might.
And the evidence seems to back that up as Singapore, South Korea have flattened that curve much faster than say Italy or Spain now is really spiking. And so I think that is the best explanation for why this is happening. The other side of that though is, if you go down further and it is an event that eventually gets under control and certainly we will get it under control with a vaccine and medications to resolve the problem, and we’re on a fast track to do that. Then that recovery can also be faster because you went down deeper.
Great Larry, but what difference does it make to me as an investor? Should I actually be changing my course of action based on whether or not I’m looking at a command and control type of operation or something more open like we have in the United States?
Well, if you knew more than the market did, I would say yes. So the right way to think about that question is, if you’re worried about an issue, just like you said, whatever it might be, Swedroe’s rule is to just ask yourself this question, “Am I the only one who knows this?” Does Warren Buffet, all the hedge fund managers, money managers who do 90% of the trading as institutional investors. If they know it, which is certainly going to be the case, it’s already in prices, and as you pointed out, that’s why our stock markets are already down much more because that has spread more quickly than anyone thought. And we’re now more at risk. So by the time you have the news, it’s no longer value relevant information because it’s almost certainly embedded in prices. And I would add this. Because markets are psychological or investors are psychological, we tend to overshoot.
So it may be that prices have collapsed more than they should based on the pure economic news. We don’t know this is the bottom, but at some point it seems likely we will overshoot. It may have happened already and you don’t want to be trying to get out and maybe it’s already overshot. Whatever you’re worried about, I can assure you the best estimate of what will happen is already in prices. It doesn’t mean it can’t be worse than the best estimate, what the smartest people are thinking.BAnd you could be sure that the Warren buffets and all the big hedge funds, they have the top epidemiologists in the world advising them about what is the likely outcome here. So they have even more information than you did.
Well, thank you so much Larry. I appreciate that assurance and I thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com or by emailing your question to firstname.lastname@example.org. Or just clicking the corner of your screen and it’ll take you directly to the website. Remember, there are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that I’m giving you straight answers to your questions, it will bring a sense of calm and allow you to apply what you’ve learned in pursuit of good decision making. So please follow us. And by all means, ask Buckingham.