Investors are allowed to change their minds

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The Markets

By Arthur Chalekian GEPC

[Financial Consultant]


They’re investors. They’re allowed to change their minds.
Just a few weeks ago, on September 17, the Federal Reserve Open Market Committee (FOMC) decided to leave the fed funds rate unchanged. In part, this was because, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
The next day, September 18, stock markets tumbled. By the time September was over, many markets had closed on their worst quarter in four years, according to the BBC. The Dow Jones Industrial Average fell by almost 8 percent, Britain’s FTSE 100 was down 7 percent, Germany’s Dax was off by almost 12 percent, and the Shanghai Composite lost more than 24 percent.
Last week, on Thursday, the minutes of the FOMC meeting were released. Investors’ response was quite different. Barron’s reported many believe a rate hike during 2015 is less likely than it once was, and that reinvigorated investor optimism:
“Going into Friday’s session, global equity markets’ valuations were enriched by some $2.5 trillion, according to Bloomberg calculations. As for U.S. stocks, Wilshire Associates reckons that they tacked on 3.44 percent, or approximately $800 billion, over the full week, based on the gain in the Wilshire 5000 index, their biggest weekly gain in nearly 12 months.”
Why does the same news elicit two very different responses? There are many reasons. Foremost among them is the fact a lot of elements influence markets – investor confidence, company valuations, central bank actions, automated trading, and many others.
What does last week’s upward push mean? One analyst cited by Barron’s suggested we’re seeing a bear market rally, but only time will tell.

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One Response

  1. Stock market volatility

    Stock market volatility has been relatively elevated in recent months. Is the market sending an important signal about the U.S. economy?

    Not necessarily. Market movements and economic developments often send different signals. Take a look at the stock bull market that began in March 2009. At first, market expectations for an economic recovery were muted, even as the economy rebounded more than initially expected. The prevailing pessimism kept valuation measures for stocks, such as price/earnings and price/book ratios, in the lower range for several years.

    In more recent years, market enthusiasm accelerated, and U.S. stocks reached all-time highs. Meanwhile, economic growth has remained modest. The result: Stock valuations appear stretched.

    Even with the recent volatility that led to the first market “correction” in four years (namely, a market decline of more than 10%), stock valuation metrics are on the high end of the historical range. At the same time, weak global growth has prompted the Federal Reserve to hold off raising U.S. short-term rates.

    Financial markets react immediately to the constant stream of new economic data, business developments, and statements by policymakers as traders attempt to price securities based on real-time changes to perceived risks. These short-term, up-and-down reactions tend to wash out over time. Instead, longer-term economic trends ultimately determine long-term market direction—but that picture is hard to discern in advance.

    According to Vanguard, China’s slowdown and other worldwide deflationary pressures indicate that investors should maintain modest expectations for market returns. Vanguard’s long-term outlook for the stock market remains guarded, but not bearish. Markets could remain bumpy for some time.

    Nonetheless, some pundits believe investors should remain in the markets and stick with their long-term asset allocation strategies.

    Dr. David E. Marcinko MBA


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