Since October, prices of stocks have been on a roller coaster ride. The market soars to dizzying heights before plunging to nauseous depths. Investors are left with churning stomachs and hand-wringing anxiety. Even the stock experts are left shaking in their shiny cap toe shoes.
What makes the current market gyrations so incomprehensible is the booming economy. Market experts subscribe to the theory that stock price increases follow real growth in the Gross Domestic Product (GDP), a barometer of economic health. However, the correlation doesn't apply today.
From 2006 to 2014, the average growth of the stock market increased at a rate four times higher than the average GDP. In the second quarter last year, real GDP growth zoomed to 4.2 percent, the highest in more than a decade. The third quarter was a robust 3.5 percent. But stocks nosedived.
Stock prices also have plummeted in the face of climbing corporate profits. American companies posted corporate profits of $3.5 trillion in the third quarter of last year, an increase of $69.3 billion. It marked an all-time high for corporate profits. This should translate into higher stock prices.
Some economists blame the sagging world economy for the downturn. Others cite the trade war with China. Many theorists also point to the uncertainty over interest rates and unrest in the Middle East. The worry list stretches into infinity. Stock brokers act as befuddled as the average investor.
Businesses reporting fourth quarter earnings are fueling apprehension. Apple recently attributed the China trade crisis for its tepid results. Market gurus accepted the thesis. The truth is the price of Apple's iPhone is five times more expensive than its Chinese competitor's. Trade is not the issue.
You can bet in the coming weeks every American firm with weak earnings will lay it off on the China trade squabble. Analysts will nod without challenging the premise. There is no question China's tariffs are a negative, but China's economy has softened, especially consumer spending.
No pinstriped suit on Wall Street will confess the real reason for the market skid. It is plain old fashioned fear. Astute market players aren't supposed to be swayed by emotions. That's for the great unwashed individual stock pickers. But it's the most logical explanation for the up-and-down market.
Their worst nightmare is the length of the current Bull market. In March of 2009, the Dow Jones stood at 8,599. On January 11, the Dow was teetering at 23,995 after soaring as high 26,186 on February 1 of last year. That is an astounding gain of 15,396 points or 179% in 118 months.
The previous record Bull market rumbled for 113 months from October, 1990 through March, 2000. During that stretch, the Dow rose 417 percent. That still stands as the top gain in history. Market technicians are certain the Bulls can't run forever. Duh. But no one can predict the expiration date.
That accounts for the wild swings in the market. A day when stocks begin falling at the opening bell turns into a rout as big institutions get nervous that a huge sell-off will lay waste to the market. If the market trends upward, all the investment whales swim in and swallow up stocks to lift prices.
This see-saw effect is a classic example of fear ruling the market. Forget the age old investment hypothesis about efficient markets. No one wants to be caught fully invested in the market when it plunges 20-percent that would signal the return of the hibernating Bears.
The market follows this volatility with a popular measurement known as the VIX or CBOE Volatility Index. Most specialists call it by another name: Wall Street's fear index. The last time the index performed this way it triggered a crippling sell off. Fear can make the savviest investor panic sell.
Stock market insiders often pooh-pooh the fear factor. They point out that most trading in the markets is orchestrated by computers running sophisticated algorithms. But when market trends spike, computerized trading triggers selling or buying that exacerbates the market oscillation.
A couple of indicators to watch over the coming weeks and months are measurements that make up the VIX gauge. One is the spread between yields on invest grade bonds and junk bonds. The other is money leaving the stock market for higher returns in Treasuries and other safe haven investments.
When you listen to the talking heads on television and read the financial pages, discount most of the skittish news about the market. There will always be speculation about a market meltdown. Uncertainty exists even in Bull markets. Instead look for signals indicating increasing fear.
That is all you need to know to understand today's stock market. So cancel your subscription to the Wall Street Journal and turn off CNBC business. Be content knowing that all the knowledgeable investment experts have no more insight than you do about the future of the stock market index.
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