Several explanations have been put forward for the latest bout of market turbulence, but our favourite comes from Howard Marks of Oaktree Capital. Plenty of market reports, he points out, ascribe the turmoil to factors ranging from China to slumping oil prices and jitters over higher interest rates. But these issues are hardly new: the oil price slide began in mid-2014, and is in any case bullish for much of the world. The real story here, says Marks, is that investor psychology has reached a tipping point.
“One of the most notable behavioural traits among investors is their tendency to overlook negatives or understate their significance for a while, and then eventually to capitulate and overreact to them on the downside.” This is human nature: people rarely take a neutral and detached view. So for years markets have been able to shrug off problems, including subdued growth in the debt-addled developed world, geopolitical flare-ups, US political gridlock, and the prospect of dearer money.
Yet since summer 2015, the cumulative impact of all these problems has become too much: “the tipping point”, a “sudden wake-up call to the existence and importance of risk”, has arrived, even though the fundamentals have barely altered. Now that the psychological pendulum has swung from “flawless to hopeless”, markets are starting to look more attractive – although investors’ tendency to overreact suggests that “while this may be ‘a time’ to buy, it’s unlikely to be ‘the time’”.