Current market fluctuations more about psychology

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Published: June 20,2010

Tags: column, finances, MBJ, Scott Reed

Well, it’s no wonder that everyone is once again worried about the stock market.  What with Greece having problems funding their debt, (not the Broadway show but the actual country), and Goldman Sachs out there creating products and then betting against their own children, so to speak, after selling them in good faith to their clients.  Congress is out there spending money like an oil well whose pipe has blown off.  Speaking of oil wells….well, you’ve seen the pictures.  Obviously the market is going down….well, wait…I thought it was going down.  I mean, I assumed it was going down with all this bad news out there.  But I just checked on this Thursday, May 27th, and it appears we were up 284 points on the Dow Jones Industrial Average today.  How could that be? 

There are some fundamental truths in the investment world.  One of those, as far as I am concerned, is that there is an inverse relationship between market volatility and credible news in the financial press.  I have a policy of stepping back at times like these and forcing myself to look at the big picture.  It is probably easier for me than most because I have a propensity toward the big picture view anyway.  But these days, the financial press is absorbed with the challenge of finding reasons to justify market movements.

It’s just not rational to report that things are looking better in the midst of a 10 percent market sell-off, so we blame it on Greece.  I’m not saying that Greece doesn’t have some real problems to work through.  I am saying that if the Greece story had broken when the Dow Jones Industrials were trading at 7,500, the market might just as likely have risen on the news instead of declined.  

In my opinion, the reason the market declined is much more simplistic.  I think the market declined because there were a lot of investors that were looking for a reason to get out of the market. If you think about it, the market decline from 14,000 on the Dow Jones in the fall of 2007 to 6,400 in the spring of 2009 was a life-altering event for many, if not most investors.  Investors had to look at extending their retirement plans, downsizing their house, going back to work or foregoing their plans for a lake house.  To each his or her own problems, but life altering nonetheless.  

Then we had the market rally of 2009 and 2010.  The market came back to a level where retirement looked possible again for those who stayed the course.  Lake houses are back in the picture because, even though you have less money, your dream home costs less to buy now.  The market rally has created a group of investors who have said, “Well, I got through that, I need to look for a place to get out and lock in some of this newly found market value.”  If healthcare and financial reform weren’t enough to get them out of the market, along came Greece.  Add to that an intraday trading discrepancy and you have a 1,000-point drop in the Dow.  

So, how did we rebound so fast? Well, there is this other group of investors that couldn’t take the pressure of the market decline and got out before they could take advantage of the rise.  Now they are looking for a place to get back into the market.  All they need is to see enough of a decline to feel like they are getting a bargain and they are buying back in.  What better time than after a 1,000-point drop in the market?  They buy the market, it rises, and the cycle begins again.

I understand that this isn’t technical enough for most of you when you are trying to make decisions with your investments.  That’s why the financial press will tell you exactly what happened after it happens and they will tell you what caused it so you will feel informed.  It’s comfort food for the investing world.  But the answer may be much more basic than they let on.  The day-to-day fluctuations of the financial markets is much more about psychology and much less about Greece, or the Euro, or healthcare or financial reform.  If you think about the people you know who invest in the markets, is it more likely that they are making moves in their portfolio based on an intricate understanding of the situation in Greece or from fear or greed.  I vote for the fear and greed motive.  It’s easier to understand and more importantly, it helps me keep my eye on the ball.

 

Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo.

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