Global Stock market performance is causing concerns for many investors. What’s happening in these stock markets? Large swings in the Dow and other stock markets over the past months are causing high anxiety. It’s been a bumpy and costly ride for many. The question on many investors’ minds is whether the stock market performance will improve in the short term.
What’s Causing Large Swings in Stock Market Performance
As the chart below shows, the DJI fell 1,000 points between September 25 and October 15, and by October 25, recovered more than half that decline. Neverthelsss, notice the 50 and 200 simple moving averages (SMA) are almost flat over the month.
What’s causing these steep declines with occasional major rallies? To answer this question, we need to review briefly how stock prices are set. As in most markets, supply and demand establish stock prices. Each stock has an intrinsic value represented by today’s value of estimated future earnings. But buyers and sellers interact on the market based on their views of each stock’s value, among other things.
Computing the intrinsic and transaction values are highly subjective and often speculative. Calculations can be complex and reflect significant assumptions about the future state of the economy, competition, likely product offerings, expected demand and prices, and corporate decisions. Typically, these inputs change often. As assumptions change, expected future value changes, and people’s views of stock’s values change.
Stock Market Performance Affected by World Events
To be sure, stock market performance is affected by world events. Today, the world is in turmoil. Uncertainty prevails — terrorism threats, Ebola crisis, economic uncertainties in global economies, and moribund, ineffective USA presidential leadership. Analysts, buyers, sellers, and market makers, have no idea how these challenges might affect future economic performance. As fear seeps into people’s assessment of the future, it causes irrational and panic selling, and opportunistic buying. Still, reality is, God alone knows the future.
As we process events, let’s remember what King Solomon said: there is nothing new under the sun. We have been there before, and will go there again, but with different challenges. In this blog on August 14, 2011, I wrote about events similar to today’s that caused wild fluctuations in the market. And on April 4, 2013, I wrote this blog as the market recovered from the Great Recession’s low, and people started to fret about a possible collapse.
Today, though not obvious, stock market performance is relatively good. Stock markets are high, though gyrating. Do stock prices reflect inflated underlying corporate earnings? I think so. However, here is the essence of my message on stock market performance. Greed and fear will continue to drive prices up and down. People will continue to take the short view. They will panic. They will follow the crowd and sell when everyone is selling, and buy when everyone is buying. They will do the opposite of what fundamentals might suggest.
Don’t Gamble or Speculate on the Stock Market
If you plan to invest, don’t gamble or speculate. Don’t be overly concerned about current stock market performance. Develop clear goals and plans and be prepared to focus on the long term. Though the market has wild swings, it rises over time. This 10-year stock market performance chart shows the steep decline and gyrating uptick.
Be patient. Apply effective stewardship to handle God’s money and all resources for His glory. Most of all, remember, God alone knows the future.
(c) 2014, Michel A. Bell
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