Markets Soar, then Plummet as Jittery Investors React to News
Posted on 03/02/2008, 23:48
By Dana Nicholas
For the past several months it seems that investors have been reacting to news, and news alone. This has created a rollercoaster effect in the markets as we watch the major indexes jump one day and take a nosedive the next.
Just take a look at the past month ...
On February 13 the Dow rose 178 points after stronger than expected January sales "reassured" investors. Gains were lost the following day as investors once again "surrendered" to worries about the slowing economy when Bernanke told Congress the economy would grow at a sluggish pace.
Now wait a minute! After everything we heard in January, wasn't it already clear that the economy was expected to grow at a sluggish pace in 2008? Did investors think that one good piece of economic data was going to change that?
How about this one ....
On the 24th of February, the Dow climbed 189 points after the news that bond insurers Ambac Financial and MBIA would not be downgraded, then fell 112 points two days later as "oil prices sent markets tumbling" ... and lost another 316 points on the 29th after investors became "concerned" over depressing economic reports and high oil prices.
Hmmm. Let's take another look at this. When, in recent history, have oil prices not been high? Have you heard anyone talk about them getting any lower? And when is the last time you heard about any truly glowing economic reports?
In other words, did investors simply "forget" that we haven't heard much in the way of good news for quite some time now? After all, that's the only way that any of this news could be a surprise to them.
Investors "Ignore" the Big Picture
Some of the most interesting news pieces are ones that note the fact markets are climbing despite weak economic reports ... or markets surge as investors ignore weakening housing market.
And there's the rub.
Despite all the news and data that investors have at their fingertips, they choose to ignore the big picture. Instead, they are jumping into the markets one day based on promising news, and jumping right back out the next when they realize - or remember - that there is more bad news than good these days.
Maybe it's time to stop looking at the individual pieces, and focus on the whole.
First and foremost, the housing market is in a crisis so huge that nobody knows what to do about it, or how to react. It's there and it is bleeding over, copiously, to other areas of the economy.
Financial institutions have been hard hit, construction jobs have been lost, and homeowners are not only strapped for cash, but losing their homes. In fact, Bloomberg recently reported that foreclosures jumped 90% in January from the previous period a year ago. This in itself can have a fierce impact on the economy.
To make matters worse, on February 29th, the dollar hit a new low against the Euro. A lot of people may think this has nothing to do with them, but it sure has a lot to do with their pocketbooks.
The lower the value of the dollar, the more the U.S. pays for imports. We're not a manufacturing nation, so many of our consumer goods are imported. That means prices on those goods will rise and this leads directly to inflation.
Despite assurances last year from the Fed that inflation would remain tame in 2008, the falling dollar and higher prices of many consumer goods remain in the spotlight. Record high gas prices are hitting motorists extremely hard, particularly gas-hogging SUV owners. And anyone trying to stretch their grocery dollars has felt the impact of rising costs at the checkout stand.
Get off the Rollercoaster!
In spite of the fact that the markets drop and then rebound ... drop, then rebound ... one thing is perfectly clear: The rebounds are losing ground. In fact, the Dow Jones Industrial Average just had its fourth losing month in a row, with other major indexes following suit. If nothing else signifies a downward trend in the markets, this pretty much solidifies it.
Investors are sitting on the edge of their seats as they deal with all of this, while at the same time watching their brokerage accounts, retirement savings, and other investments lose value. Ultimately, everyone wants some good news that will give their investments a nice boost.
But the big picture tells us that any lift we get is going to be short-lived.
We're in for some turbulent times ahead. Smart investors who want to avoid watching their investments sustain the same type of hit they took earlier in the decade will jump into lower risk (and yes, lower return) investments, watching safely from the sidelines as the markets perform their rollercoaster act.