Frequently, when making presentations at various places across the United States, I’m asked to give a forecast on the stock market. My stock answer (pardon the pun) is that it will fluctuate. While this answer does not often allay the concerns of the various audiences I’m addressing, nevertheless, it is a safe and predictable projection and one that never fails to come true.
For those who watch the stock market, especially those that tune in on a daily basis, it would seem that lately they might need some motion sickness medicine to keep up with the ongoing gyrations.
As you are aware, the market advances or retreats often on what seems like a whim, though the process is normally far more complicated. There is always an underlying, long-term pattern that reflects what is supposed to happen (the long-term earnings capacity of the firm in question, properly discounted for risk and timing), but it is sometimes hard to spot amongst the chaos. The market is a reactionary force, and it often moves up or down based on a perception, which in turn is based on an incident that is considered significant. Many times it could be the failure of a major corporation to reach the predicted level of earnings by a certain time—even by a penny a share, or the unexpected news that a company has exceeded its goal—once again even by just a penny. Both results tend to make the market move, almost immediately.
Within a few days, however, the markets may recognize that the news is not indicative of a driving force that will make or break the economy. As a result, more settled forces come into play, and the ticker moves in the opposite direction.
Last month, the Dow Jones Industrial Average closed above 14,000 for the first time. It was a new record, and the financial world was joyous. Why? Almost every time the Dow passes another 1,000 level, happy chatter abounds, even though such an artificial goal rarely has any substantive meaning. Remember what happened next? Almost before you could catch your breath, the bottom (so to speak) dropped out, and the market plummeted some 585 points.
Such triple digit moves, though once rare, have become commonplace. In 2006, there were 19 hikes and 14 dips of 100 or more points. Through the end of July, the market has already experienced climbs of 100 or more points 15 times along with 14 drops of similar amounts. Though the change shows that such moves are frequent, the numbers for those years pales in comparison to the 106 changes (53 up and 53 down) in 2000. Such alternations frequently result in reactions by investors.
Occasionally, buyers seem to go on strike, refusing to impart funds into particular stocks. But such movements last only until buyers divine what they think the assets are worth and put their money into action once again.
Other forces that are currently creating turbulence in the market include such matters as the rise or fall in the price of oil, the number of jobs created in comparison to the amount anticipated, the woes or booms of the housing market (seemingly more woes than booms these days), and even speculation as to what the Fed will do at each meeting, and the nuances of its words when it does nothing.
The almost-daily media proclamations about the problems in the debt and subprime mortgage sector have sparked wild swings lately amid concerns that tightening of credit might have a wider impact on consumers and the economy as a whole. This kind of tumult will probably continue while the housing sector remains on its journey toward even-keel stability. Uncertainty frequently breeds anxiety and tends to shove investors to the exits, while leaving sellers left holding the bag looking for buyers.
The most important matter related to the swings in the market is the direction of the economy. In all recent advancements and retreats in the Dow, the economy has kept on rolling forward, generally at a fairly healthy pace—a 3.4% annual rate for the second quarter of this year. As long as the economy remains strong, and I predict that it will, the market will continue to see a general incline even amidst triple-digit twist and turns.