As I was reading this morning about economic theory regarding the volatility of the stock market, it occurred to me that a) economics is clearly more an art than science, and b) perhaps there is a simple yet highly affective factor that is pivotal to market volatility, yet no one is talking about it, at least not in high-minded economic circles. The factor is both relative to the fear driving market volatility and the agent that seems to quell that fear.
- There is rarely an obvious explanation for why stock prices jump around, but it’s possible that these ups and downs represent people’s rising and falling fear that one of the rare disasters is about to strike.
The term “rare disaster” references the biggies in life, say, WWII, the Great Depression, and the financial meltdown in 2008. In today’s crazy world, we can add to that the notion that the crazies in Washington D.C. will shut down the government or the Middle East crazies will get hold of a nuclear bomb, anthrax, or some other such WMD and the world as we will know will suddenly and swiftly change for the worse.
These are all fears, but I really don’t think the fear of a rare disaster is the reason the market jumps around regularly. It is actually much simpler than that.
- What huge, horrible thing are stock investors afraid of? What is the monster that is going bump in the night?
Clearly, the market jumps up and down not because it is afraid of a huge monster going bump in the night; rather it is constantly afraid of smaller imaginary fears, and then it is not. The market jumps around because the breathless media tells it to jump around with its incessant 24-hour news cycle. Investors run and traders take advantage, and then everyone gets bored and the market returns to the fundamentals.
The most recent example of this is Greece. Last week, the breathless media hammered the potential “Grexit.” Analysts, talking heads, and other such luminaries were telling us the market drops were because the market feared a collapse in EU negotiations would lead to a Greek default. Over and over again we heard this and the market reacted to the negative.
This morning, it appears as if we are back in the same boat with Greece, yet the market is holding onto the green. Why is that? Well, in my simple world it is because the market got bored with the hyped-up fear of Greece defaulting, and it changed the channel, so to speak.
- U.S. consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items
- Personal income increased 0.5 percent in May after a similar gain in the prior month. Income is being boosted by a tightening labor market, which is starting to push up wage growth.
It appears some of that $750 billion that went into US savings so far this year has come out. People are cashing out on the oil not-boom. Lower gas prices are here to stay for some time and folks now get it, as does the market.
Greece, the Fed, and Ukraine (which BTW, is still in a state of war, despite the ceasefire), all have caused market volatility (and will continue to do so), but when the story gets over played, the market gets bored and moves on, and then so does the breathless media. Putin is still a threat in Ukraine and elsewhere, but …
Economists continually try to explain the market, a fundamentally irrational entity, in scientific terms, which is a rational approach. I appreciate that, I really do, but in my simple reality, the market R us, and we humans have an attention span that is actually lessening (scientifically speaking), so the market volatility we see is less about Godzilla eating Tokyo and more about switching the channel when we get bored.
Trade in the day; invest in your life …
