Don’t Panic
Reflections on the Dow
I had written, what I feel, is a well-constructed post on Global Climate Change, in light of the week’s events.
Then Wednesday happened.
I’ll save the weather post, for the inevitable next hurricane.
So, you want to know what happened?
In order to fully appreciate the market events of Wednesday and Thursday, let us start with a definition, a fact, & a realization.
Definition: An asset’s current market price is the net present value of a percieved future stream of income. (e.g., How much income (dividends, interest, capital gain, etc.) will I receive over the time I hold the asset.)
That said, an stock’s current market price is based on people’s perception of the value of the company. If people’s perception changes, the stock price changes. When people perceive the future of the company looks bright (due to news, for example), the stock price rises. When people perceive the future looks dim, the stock price falls. When there is uncertainty (people do not have a common vision of the future,) there is volatility in the market.
Fact: There are, basically, two groups in the market, Investors & Speculators. Investors enter the market becasue they have a belief that the assets they hold will appreciate in value, over time. Speculators are invested in an asset for a shorter period, in the hopes of making a quick buck. When the market is driven by investors, and information about assets is free, the market value of an asset is accurate. When the market is driven by speculators or information is imperfect, the market is distorted (under- or overvalued.) If the market is overvalued, at some point, the market corrects to, what investors feel, is the true market value.
Realization: In other words, if you can convince enough people the market is over-valued, you can bring it down. Even if it is not, in reality, overvalued.
Now look at two headlines, leading-up to market open Wednesday.
‘Call Me Concerned’ About the Markets, Says Jim Cramer
Small markets correction soon possible, warns Randy Watts
These are only TWO headlines from Tuesday, and it doesn’t really matter that the content of the interviews don’t speak to a market-wide event. What matters is that enough people felt that the market was going to correct, even though, in reality, it did not need to. THAT precipitated the event.
The President has stated that the event is the fault of the [Federal Reserve bank,](Trump calls ‘loco’ Federal Reserve ‘too aggressive’) an odd claim for him to make. An odd claim, because he takes credit when the economy does well, but accepts no blame when it does poorly.
In reality, the only thing he or the Fed can affect, is people’s perception of the future value of the market.
As I said, in an interview during the event, if the company has value, a market event has only a temporary effect, being driven by temporary fear.
Unless you see a reason to be afraid, don’t panic.