Are Markets Efficient?
During university, I was told markets were efficient. The only way to add value was for money managers to allocate capital based on top-down thinking. Meaning, they would look at the wider economy and choose investment which will perform favourable for the climate.
However, as I learnt through experience, this efficient view of the market is completely ridiculous. If the market was efficient, why then, do we have market crashes? Why do stock prices get inflated for years on end and then enter bear markets that last 2–3 years?
If markets were efficient, then all market participants would have to interpret information in the same way. But of course, that doesn’t happen. There are conflicting views in the market all the time, causing volatility.
And it’s usually through these wild price swings savvy investors can earn a decent return. Yet for the moment, the only direction global equites seem to be going is up. Take a look at the year-to-date returns for various markets around the world:
Investors Not Fazed by Bad News
Surprisingly, tension between North Korea and the US has done nothing to dim investors’ confidence. Even as missiles fly over Japan’s head, investors continue to buy equities. A reasonable explanation for why investors continue to buy, is because they’re not fazed by bad news.
The 2007–09 meltdown is still fresh in investors’ minds. Thus, something on the level of bail outs might have to happen before investor pull their wealth out of equities.
As the Australian Financial Review explained:
‘After surviving 2008 and the first few months of 2009, when global share markets collapsed, it implies that investors are now perhaps more cautious after staring death in the face and aren’t that fussed about run-of-the-mill bad news.
‘These days they need something that’s off the scale and so far North Korea and President Donald Trump don’t seem to pass the test, which gives investors an idea of what has to be to give them a jolt.
‘Instead, as a result of all of this, we’re in a new world where volatility is lower and unless the news is truly horrific, investors are not going to get their pulse rate up and sell.’
‘The market’s ability to shrug off bad news has been quite remarkable,’ Macquarie research analysts wrote.
‘North Korean missile launches were probably the key source of continuous bad news in recent months, but this has been more than absorbed, particularly if the performance of South Korean equities is anything to go by at up 26 per cent.’
The problem is, as markets continue to climb, when the really bad news hits, we will only have further to fall.
Junior Analyst, Markets & Money
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