The Bull Blows by Brazil

There’s an old Wall Street adage that the stock market never gets knocked over by the same thing twice. I have no idea if that’s true, but it offers a convenient explanation for the market’s rather remarkable performance today. In the wake of the resignation of the head of Brazil’s central bank and that country’s decision to effectively devalue its currency, the market looked headed for a serious tumble, with the Dow down as many as 240 points in the first half hour and the Nasdaq off 110. But by day’s end, most of those losses had been recouped, especially in the broader market (the Dow did finish down more than 125 points). Investors looked global turmoil in the face and apparently decided it wasn’t anywhere near as bad as it could have been.

If that old adage is right, the market’s reaction may have something to do with the devaluation of the ruble and the near-collapse of Long-Term Capital Management. While these things were happening, it certainly felt like the world was ending. But you only have to look around today to realize that anyone who held on to their stocks through that chaos reaped enormous gains, while anyone who went bottom-fishing in September is probably pricing yachts right now. As a result, buying on the dips now appears to be more than just conventional wisdom. It seems to be a recipe for instant wealth.

One consequence of a market as frothy–and as irresistible–as this one has become, after all, is that when stocks tumble, it’s difficult to avoid thinking, “If they snap back to their 52-week highs, how much money is to be made?” In that first half-hour today, Lucent was down 11 points, @Home (the cable-modem provider) was down 20 points, and AOL was down more than 20. If you believed this really was the beginning of a bear market, of course, this was a good time to sell. But if you didn’t–and there wasn’t much reason to believe it was–then these stocks looked like low-hanging fruit. It took some chutzpah to jump in feet-first, but those people who did finished the day much richer than when it began.

That’s not to say that you should have jumped in and started buying. But it is to say that when a bull market has the legs that this one has, it alters the mindset of investors, forcing them to think about all the money they’re not making, instead of all the money they might be losing. Eventually, this will change, and in fact last August and September all investors could think about was the money they might be losing. But Brazil was the worst news out there, and in the end even it wasn’t enough to kill the bull.

Still, there is one thing to keep in mind. When Russia announced its devaluation of the ruble in mid-August, the market similarly panicked at the open, selling off in dramatic fashion, and then rebounded sharply, much more sharply in fact than it did today (the Dow finished up something like 140 points on the day the devaluation was announced). But within two weeks the Dow had its worst two days of the year, and within the month the Dow had given back more than 1,000 points. As I wrote a couple of days ago (see the “Pyramid Market” entry) the stock market in theory should be so efficient that the impact of Brazil’s devaluation should now be fully priced into the market. But what happened last summer suggests that investors don’t process information all at once, and that they sometimes underestimate the impact monetary crises have on global financial markets. Given that, I think a few weeks need to pass before we know if the Brazilian flu is really not contagious.