The Chinese have an expression,”may you live in interesting times,” which I would suggest we could use today.
We are going to see a change in leadership at the Federal Reserve, there’s been a government shutdown which so far has had only limited effects, there have been tremors of worry about the stability of the dollar and we are entering an unknown arena with the onset of the Affordable Care Act. Usually, the stock market doesn’t like change, but after a shaky start Monday and Tuesday, prices moved higher for the rest of the week.
The question is, why have investors ignored what usually could be disturbing news? Even the possibility of default on government debt has been, as they say, shrugged off by Wall Street.
News that gridlock between Republicans and the White House was easing sent the market up 323 points on Thursday, making it the best day in almost two years. Analysts said that the market’s energy was fueled by relief that agreement would soon be reached on ending the shutdown. It was not the shutdown itself that worried investors, but the possibility that our financial foundation could be shaken.
Was the public’s overwhelming distrust of government, which made the news, a positive sign for the market? This alleged distrust is nothing new, so it’s unlikely that it would drive a strong market rally. Could it be that the market had, as they say, a mind of its own? Perhaps, but I’ve never liked characterizations of the market as an entity with human emotions. How often do you see stories with headlines such as “Market spooked by comments from the new Fed chief,” or “Market encouraged by August housing numbers?”
The fact is that over the long run, the market has churned ever higher. But, there is a famous line from the late economist John Maynard Keynes, who said, “In the long run, we are all dead.” That’s a morbid thought, but there are still brokers who tell prospects, or clients, that in the long run, the market has outpaced inflation or has grown at an annual rate of 8 percent.
If you were an investor or a broker in the 1970s, you might recall that we had a bear market from 1974 until August 1982. You can’t believe how awful that eight-year period was. We had high interest rates, high inflation, poor earnings, with the resulting discouraged investors. The joke was, and it wasn’t so funny, that if you were calling prospects – cold calling, that is – you would not admit you were a stockbroker or even involved with the stock market. You were warned not to mention a company’s name, in case the prospect asked “Chrysler – is that a stock?”
Hard to believe, but stocks such as Ford Motor company were trading as if they were in bankruptcy. If my memory serves me right, Ford was trading at just over a dollar a share and it was typical of what happened to major corporations.
There were three main drivers of falling stock prices – high inflation, high interest rates and poor earnings. Of course, looking back on it, the terrible market offered investors a great opportunity to make money.
The problem was one of psychology. You may have heard the adage that the market is driven by two emotions: fear and greed. That oversimplifies things, of course, but there is still some truth in that. Didn’t we see the same phenomenon in residential real estate, even right here in Fairfield? For a long time, those investments paid off, but then we ran into stagnation which lasted quite a few years.
We can’t predict emotions, which means we really can’t predict stock prices.
Bud Stevenson, a stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.