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I've long believed that the explanations for daily market movements make no sense. If you want to know why big market players buy or sell, the media is not going to find out for you. And since you have no way of knowing who the big players are; what they're buying and selling; and why, the best you can hope for is the daily quotes from some market analyst on a reporter's contact list.
Thinking about those probably meaningless comments, it seems that the stock market has been moving based on three factors over the last several months: oil prices, credit market conditions, and the Fed's actions. In theory, there are lots of possible combinations of these three, but here are three scenarios that might be worth considering:
- Rising market. What makes the market rise in the short-term? There are two things that have really driven up the market. Unexpectedly good news on the credit front -- whether it's a bank taking a lower than expected write-down or a deal to save the bond insurers. And of course, in the short-term, stocks seem to rise anytime the Fed announces a bigger-than-expected rate cut or suggests that further cuts are forthcoming.
- Falling market. Rising oil prices are not good for the market -- which is what we saw after the price recently topped $100 on concerns that OPEC would cut output and that a refinery was damaged. The market also falls if the Fed doesn't cut interest rates as much as investors expected or it hints that inflation is a concern -- as it did today. And the market is particularly moved by surprising new problems in the credit markets -- such as a bigger than expected bank write-down or the emergence of a new class of busted structured security.
- Flat market. Sometimes it appears that economic news can move the markets -- for example, if unemployment is worse than expected. However, it seems that investors have largely discounted bad economic news. So in the absence of deviations from expected levels of oil prices, credit market conditions, and Fed policy the market seems to remain roughly where it is.
So what does this mean for investors? The market does not seem to have a clear direction and it is down 12.5% from its October high. For long-term investors, the lower level of the market may signal a buying opportunity if you purchase shares in an index fund. But it's quite possible that if you keep buying in every month, you'll be lowering your cost basis since the market has a good shot at tumbling further.
If companies started to report rapidly growing earnings, then the market would probably follow those earnings up. And perhaps that's what is keeping the market in nowhere land -- confusion about whether corporate earnings will grow or decline. A recent report from Corporate Library suggests that companies aren't helping to alleviate that confusion since less than a third of the S&P 500 disclose the earnings targets on which executive compensation is determined.
While this raises questions about disclosure, it also makes it hard for investors to know whether to expect rising or falling earnings. Until that becomes clear you can either try to keep your powder dry or use the lower market levels to reduce your cost-basis.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
2-20-2008 @ 1:32PM
Dan Barnett said...
So the plan would be to go to stocks with secure large dividends so that the potential for loss would be made up in the dividends?
Totally off-topic, but a question please. Would it be possible for a major bank to value their sub-prime investments at zero; take a tremendous hit in the earnings once & declare that they can't be hurt any worse? It strikes me that the constant drumbeat of writeoffs is part of the problem. The amount doesn't seem to matter as much as the repetitive writeoffs.