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Investor Confidence Knocked By Volatile Market – and Vice Versa

17 October 2008 - News - Editor

Stock markets in the U.S. opened low on Thursday, with traders apprehensive as to what surprises another trading day may hold. Adding weight to the terms "yo-yoing", "see-sawing" and "roller-coaster ride" that have become commonplace when describing the volatility of the current market, following a morning of stomach-churning declines, the market picked up dramatically with the Dow closing at 8,979 - more than 4 percent up, while the Nasdaq rose more than 5 percent and the S&P climbed by over 4 percent. European markets did not follow suit as has been the case recently, and London’s FTSE, Paris’s CAC-40 and Frankfurt’s DAX all dropped between 4 to 6 percent.

MSU Economist, Doug Roberts, has pointed out that stock markets are being driven by two factors – fear and greed. When fear kicks in, investors tend to make irrational decisions, often deciding to opt out, even if the stock they own is fundamentally the same as the previous day. Since the market is substantially driven by investor confidence, irrational decisions have a dramatic effect on it. Because of the volatility of stock markets, and irrational investor decisions driving the ups and downs, economists are averse to using the market as any sort of indicator as to the overall health of the economy.

Adding to the stress, third quarter corporate results are beginning to trickle in, and they don’t look good. Merrill Lynch, the financial institution which agreed to being bought by Bank of America in an effort to avoid bankruptcy, reported a quarterly loss of $5.2 billion – the fifth straight loss recorded. Financial results of other major corporations are likely to be released before close of trade on Friday.

Ordinary investors, many of whom are nearing retirement age, who have been using the stock market as a means to build their nest eggs, are finding the stock market volatility nerve-wracking and are looking to their portfolio managers for reassurance. Self-employed certified financial planner, Deborah Maloy notes that the majority of her clients have been unsettled by the ongoing drama on the markets and she has begun to question the value of her advice to them. Tried and tested formulas of having a balanced and diversified portfolio, thinking long-term, and careful asset allocation, seem to have lost their meaning as investors and portfolio managers are no longer confident that long-term holdings will weather downturns and gain in value again.

 


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