The end of crisis culture in the markets doesn't mean we should cease being vigilant about risks, but it is a needed and healthy shift
Everyday, we are treated to a new peril: Today we have sequestration, a word not much in anyone's lexicon until recently. The mandated cuts to the federal budget, $85 billion by last count, will further stunt anemic economic growth, or so economists and the Congressional Budget Office guesstimate. The prognostications surrounding the sequester have been grim, with White House Chief of Staff Denis McDonough warning of a "devastating list of horribles," ranging from severe travel snafus to the end of vital education programs.
In the political media, in Washington, and in the defense industry (which will see especially draconian cuts), all of this is Big News. But after months of buildup, the end-of-days drama is ending with a resounding thud. The meh reaction of financial markets of late is particularly telling (the Dow flirted with its all-time high this week). Markets are mood rings, and the mood now is one of boredom and fatigue. Even the New York Times led page 1 not with the sequester but with a studied picture of a nun saying goodbye to the retiring pope.
This is a good thing. Since the housing market imploded six years ago, we've been suffering from black swan fever. When Nicholas Taleb penned his passionate polemic about the inability of financial markets to allow for unanticipated and rare events ("black swans"), he did us all a great service in highlighting the narrow-mindedness that can have dire consequences.
Then the pendulum swung too far. Instead of complacency about rare, destabilizing events, the markets, the media and the politicians developed a fixation: Find the next black swan. That has led to a belief that any sign of stability, any indication that the worst may have passed is simply a false dawn. Luckily, that skittishness has passed.
Yes, financial markets have been in a holding pattern of late. But if what is happening now had happened in the past few years, the markets would have been roiling. Flat markets now are a good sign.
This week alone, Italy's elections did not go as many outside of Italy would have hoped, but the markets shrugged. Instead of ushering in a center-left coalition committed to austerity and labor market reform, there was an indecisive result whose main winner was a professional comic whose message is throw-the-bums-out. Later in the week, the official Italian unemployment figure was announced as close to 12 percent and economic activity contracted more than expected.
With the week bookended by renewed concerns about the eurozone and the sequester, you would have thought markets would easily slip into a panic that has been all too familiar of late. They have not.
In fact, during the past three years of rolling crises, equities and bonds have been on a quiet tear. Since May of 2010, the S&P 500 is up nearly 40 percent, and there has been a boom market in bonds as yields have fallen globally. That has not helped people who put their retirement income in government bonds or money markets, at least not directly, but it still demonstrates the disconnect between the climate of fear that has suffused our economy and political life and the relatively stable bull market that has been chugging along at the same time.