The New Normal in Messy Stock Markets
This week’s market mess was accompanied by the usual glut of pundits with wild, contradictory, or just plain goofy explanations as to the cause of market volatility.
But a former colleague had the best explanation of all. When asked why prices rose he would say it’s because “there are more buyers than sellers” and when asked why prices fell, he’d say because “there are more sellers than buyers.”
His analysis was facile, but the only valid one and a welcome relief from the plethora of narratives that simply confuse the situation and the media.
Lately, these range from U.S. President Donald Trump bragging that rising markets are a complete vindication of his leadership to pundits who say this is a bubble that’s bursting because higher inflation and interest rates are a given.
There are no givens and lots of misunderstandings. Some media spoke about a “panic”, a “free fall”, or the “biggest drop in history”.
This is nonsense. To be accurate, the “biggest drop” in history occurred in 1929 when the bellwether Dow Jones Index (DJI) went from 400 points to around 42 by 1932. Now that’s a drop. This week, the DJI has dropped only 4.6 per cent, rose and then dipped again.
So far, this is a “correction” of a wildly bullish situation with many moving parts. Taking the Dow Jones alone, it has gone in the past year from 19,962 to a peak of 26,616 when it declined then bounced around.
But what’s important is not to confuse the speed of a correction with a free fall. The fact is that markets were ridiculously high and that never continues forever.
So why did this happen?
I believe it was more sellers than buyers or profit-taking by shareholders who, for a year, thought price hikes would never end until last week when a few decided to cash in. That led to more sellers than buyers and the sell-off was launched.
Unfortunately, today’s sell-offs slice value in minutes, as opposed to days or weeks, then result in equally accelerated buy-backs. This acceleration is due to computers that do most of the trading and all “think” alike: They buy at a certain price point, and sell at another. Aggravating all of this is that results are available in real-time.
Volatility is not instability which is why, as stock market guru Jim Cramer of CNBC rightly said, any investor must stick with basics and avoid panic.
Besides that, the public must understand that stock markets should never be confused with economies or confused with a report grade on politicians.
Last week’s market mess will be the new normal for a while and if there’s one guaranteed benefit from all of this is that President Trump will understand it’s not all about him.
Presidents affect markets in indirect ways. For instance, the Dow Jones Industrial increased during Reagan’s eight-year tenure by 147 per cent; during Bill Clinton’s by 225 per cent; and during Barack Obama’s by 148 per cent. But the market declined 18 per cent during the George W. Bush Presidency due to 9/11, war, and deregulation.
There are external pressures on markets but this looks like investors counted up their rapid profits made in 2017 and decided to cash in and spend or invest the money elsewhere. Others followed suit and prices fell so rapidly that new buyers came in, unconcerned about inflation or a bubble, and pushed prices back to peak levels. Then down again.
The wild swings in the market reveal that the so called “Trump Rally” was never about President Trump, said Cramer. “It was just an asset class doing much better around the globe. And it’s readjusting around the globe.”
First published national Post Feb. 9, 2017