Duncan Frearson of Smith Street Capital puts it well:
Anyone who has kids knows when the lights go out, the boogey man appears. We are in the unfortunate position where problems in Europe, the end of some government stimulus programs, some large budget gaps and a growing oil leak have turned off the market’s lights. The boogey man has entered the mind of the market causing some fearful behavior.
Investors and fund managers are clearly in panic mode. We are not in a double dip, and there are no real indications we are going into one but the fear of renewed recession has sent investors stampeding into oil, out of oil, into copper, out of copper into gold, out of gold ($1,186 today), in and out of the Nasdaq, AAPL, Small Caps, Financials… on and on and on with virtually no actual changes in earnings or outlook from any sector other than the general trend of SLOWLY improving conditions.
Panic is easy to provoke. Get 5 people to act crazy outside a store and tell them the whole town has gone nuts and they need to shut the windows and turn out the lights. Once they listen to you, take your show to the next store but now you can point to the first store as an example of the panic that is on the streets. By the time you get half a dozen stores (think funds) to panic, you don’t even have to do your little show anymore, people just see store shutting down and they ask them what’s up and rumors take on a life of their own and, before you know it, the whole town is in a panic over nothing real at all.
"At the end of the day", Frearson continues, "the earnings power of a company is all that matters and thus understanding customer behavior is paramount. For the economy as a whole we should ask ourselves: are we currently spending beyond our means? Individuals are earning at record levels – around $10,103 billion for real disposable personal income in Q2 and we are only just beginning to push real spending beyond Q4 2007 levels leading to a savings rate in the 3.5% range, according to government data. The debt service coverage ratio and the financial obligations ratio both indicate the consumer is de-leveraging into a more stable financial foundation."