Inexplicable Wall Street

Reasons and rhymes of stock market prices – they are a new mystery. What should be up is down, and the opposite as well. Our times are in turmoil. So are the stock markets. Yet they find reason for higher prices even when all is gloomy. What gives?

Clues to what drives the markets are elusive. Some say it rests solely on obscure mathematical algorithms. Others claim it is all about counter sentiments to crowd reaction; if most market sentiment is down, the anti-crowd buys. If enough antis exist, prices will rise even when sentiment is low.

Then there are the computer driven trading machines. These are large firms shepherding their investors’ funds through investment wars over the long haul. They move large blocks of stock to satisfy myriad portfolio objectives. If the market downticks, the computer says buy and a million shares are traded in a trice. Do that several times with many hedge funds, investment firms and large brokerages, and prices respond. The results magnify.

Selling on counter-trends is one way of hedging bets on the market. It certainly helps explain what’s been happening on the market these past two years. Recall the major events that should affect stock values, and then observe what happened:

·        Federal Reserve stated their intent to raise interest rates

·        England votes for Brexit

·        US pulls out of Paris global warming pact

·        US pulls out of TTP treaty with Pacific Rim nations

·        US bullies NATO partners on their low financial contributions

·        US insults China in both economic and diplomatic terms

·        US insults Russia in military, economic and diplomatic terms

·        US kisses Putin’s rear end; lifts sanctions

·        US starts trade wars with major tariff adjustments; world economic community reacts

·        Interest rates go up as expected

·        Interest rates go up slowly as expected

·        The lunar eclipse occurs as forecast

·        The weather heats up; or cools down; all as forecasted

Whatever happens – expected or not – ballyhooed or not – the market prices on all the major stock exchanges shift in wild patterns. Huge gains one day; huge losses the next; and just when hopeful signs are evident in economic circles, prices take a plunge when everyone else would expect them to rise.

Capricious. Illogical. Counter intuitive. Call it what you will, but stock prices have been volatile throughout the trump presidency. These conditions are golden opportunities for those with risk tolerance. All the rest are risk avoiders.

There is a problem, however; volatility can lead to catastrophic losses. The government shutdown would have led to huge price drops in years past; didn’t happen this time. Cyclical retail swings would typically lead to stock volatility. Only a few wobbles this time. International instability ought to exacerbate volatility. Not much reaction currently.

The point is all of the unstable factors leading to volatility of stock prices currently exist. That volatility currently exists, too. What combination of these elements will lead to a market crash? We have already witnessed one since fall of 2018. Will 2019 witness yet another? If so, will this last for a long time?

We shall see, won’t we? Meanwhile, the Wall Street shuffle continues to amaze. It defies the rules of gravity. That should be a red flag in and of itself.

January 29, 2019