The Independent Market Observer

How Long Can Markets Ignore the Real World?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jul 18, 2014 10:53:00 AM

and tagged In the News

Leave a comment

uncertaintyYesterday, we saw a passenger airliner shot down over what is arguably Europe. We saw an invasion launched as missiles rained down on civilian towns. And, in far less devastating news, we saw equity markets decline.

The Ukraine conflict has been simmering for months; the Middle East has been in conflict for decades. Still, yesterday's news came as a surprise, knocking markets down.

What’s interesting is how many people, and the U.S. media, have normalized these conflicts, putting the possibility of very unsettling surprises more or less out of their minds. Who now remembers the Russian annexation of Crimea? Or the Syrian war, still underway?

Through all of this, and through the snowdown, the stock market indices have been hitting new highs. Interest rates have remained very low—perhaps too low. Investor complacency has also reached new highs. Everyone assumes that things will continue to go well.

Are we in for another Lehman moment?

Trouble is, we'll have no notice when something boils up that, in retrospect, should not have been a surprise. You hear the phrase “Lehman moment” quite a bit these days in the investing world. No one knew the day before Lehman failed that it would become a byword for meltdown, the moment when things really hit the fan.

Taken in context, the market declines yesterday are modest. Nothing to worry about, normal volatility. Everything is still good, as far as investors can tell, and that will continue to be the case—until it isn’t.

Stability breeds instability

The longer things stay good, the more people want and are allowed to take risks, the more money is borrowed, and the more everyone thinks that it will be different this time. Things have actually been incredibly stable in the markets over the past couple of years, despite the usual chaos in the real economy and geopolitical world. This mismatch has led to record markets and outside returns.

Anyone betting this will continue indefinitely is assuming that there are no more surprises out there, similar to or worse than what happened yesterday. That may be so. But the safer bet is that, at some point, we will see a convergence between the financial markets and the real world. Tails only wag themselves for so long.

What should investors be doing?

Bonds, scorned in the face of equity returns, did well yesterday. So did gold. For investors who have moved more heavily into stocks, or whose stock allocations have grown substantially, maybe it’s time to consider reallocation.

You never know when those bombs might drop into your portfolio.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®