This article is from the Wall Street Journal and talks about the volatility of the market which is causing the stocks to go up and down leaving the investors mind boggled. The main reason for this volatility is the confidence: currently there is no confidence in the market as Europe is unable to come to any concrete conclusion regarding its debt situation and companies in the United States are posting results which are well below the market expectation.
The performance of the stock market is taken as a sign of the health of the economy and the fact that market is swinging from red to green and vise versa shows how unstable US market is right now. Many people are of the view that even in this situation, the government should not increase spending as it will lead to a "crisis" in near future as happened after 9/11. However the thing to note is that, currently investors are pessimistic and the only way to regain confidence is if the government continues to spend and calm the markets down. If the government does not fill in the gap created by falling investments the economy would fall into a bigger recession creating further unemployment .
One interesting point you make is about the increased defense spending after 9/11. With the war in Iraq declared over it will be interesting to see what the effect this has on the economy. Seemingly the money spent on the war can now be diverted from foreign paramilitary groups to helping the domestic economy.
ReplyDeleteShort term expectations do not really matter. A lot of economists look at the stock market performance as a sign of economic growth. If you read security analysis you will know how this is a major market for speculation.Between 1945-1965 the US output doubled while the DOW Jones remained the same level. As such it just shows to a certain extent how the rich are doing
ReplyDeleteStock prices are just small indicators and reference of how the overall economy is doing. People cannot based it to judge the overall economy of the US.
ReplyDeleteI agree to your point but stock market still is key factor as it shows the health of the companies and sentiment of the investors.
ReplyDeleteI wouldn't say that stock prices show the "health of companies"
ReplyDeleteStock prices merely reflect speculation about a given company etc. Just as the fed doesn't "magically" raise/lower interest rates, stock prices raise/lower because of investors predictions, feelings, or as you put, "sentiment" about a given company.
Saar's point about short term expectations not mattering has validity, but i would argue that it cannot simply be brushed off. The faster we get expectations and confidence to stabilize the more investing we see and the faster the health of our economy will recover. Its a cyclical observation. In a way, falling prices shows the health of a company, which reflects a company not meeting expectations and the public losing confidence in them. Peoples patience has run dry, i believe the volatility of the market reflects that.
ReplyDeleteThe market has lost its mind, the deficit panel has yet to bring forth its cuts? Do we have any doubt this could be some painful medicine? Its like a feeding frenzy. I would not take any long term moves till after the deficit panel proposals are firmed.
ReplyDeleteThese might all be short term moves, this thing could drop like a brick if something spooks the market.