Another week, another chance to ride the stock market roller coaster. Have we hit bottom yet? Probably not, there’s surely another twist, turn and loop-de-loop on the tracks to come. Why does “the market” keep doing this to us? What exactly is this bear that has caused trillions of dollars of inflated stock values to vanish, that has caused the government to dump more than a trillion more dollars into the bailout trough, that leaves even seasoned and savvy investors like Warren Buffett shaking his head?
“The market” is just people. Human behavior. Psychology in its greediest, most insatiable, most fearful, most duplicitous, least altruistic guise.
Markets move up because people want to make money by investing money. People buy stocks that are likely to go up in value. Markets move down when people decide to sell their stocks — they do this to get cash, or to protect the value of their investment when stock prices start to fall when too many people are selling out all at the same time.
In the last two years, the overall value of the stock market has declined by more than 50% as measured by the Dow Jones Industrial Average — from an unnatural high of 14,000 in July 2007 to Friday’s close at about 6600. Translated to personal terms, for many people that decline may well mean waiting 5-10 years longer to retire than they had planned just a few years ago, since for many regular people the biggest stake they have invested is some kind of retirement fund.
More stunning declines in stock prices hit individual companies that are in trouble in this economy, none so troubled as banks. Citigroup, once the nation’s most powerful bank, saw its stock price decline to 97 cents on Friday, down from a 52-week high of $27.35 last April. As somebody said ruefully the other day, you know your bank is in trouble when its stock price is half the value of the fee it charges for an ATM transaction!
As corporate values decline, more and more companies are finding it nearly impossible to sustain the capital necessary to stay in business. Names that consumers recognize are on the skids. Circuit City closed for good this past weekend. Linens & Things is gone. General Motors is rumored to be near bankruptcy. Other automakers, retailers, newspapers, and industries of all kinds are suffering tremendous economic stress in this recession.
Many people may not quite understand what AIG is all about, but the financial catastrophe of that large and complicated insurance company reveals some of the behaviors that created this international financial mess. Not satisfied with simply investing money the old fashioned way to make some profit, AIG ventured into risky and complicated forms of investment called derivatives in order to earn a lot more money. Other investors did the same, but the morality tale of AIG is clear. AIG is now on federal life support, requiring billions of taxpayer dollars to keep it afloat so that its essential business does not tank — the life insurance business, on which hundreds of thousands of policyholders depend for their family’s financial security.
Greed is one of the major reasons why our nation is in this economic mess, and fear is one of the reasons why we can’t seem to climb out of the pit — fear among investors that if they returned to the market today they would still lose a lot of money. So, the market continues to tank as investors sit on the sidelines holding their cash in coffee cans or whatever they use to hold cash, what do I know about that…. What I do know is that the “bottom” of the market is probably yet to come. Some people think it might bounce soon, but I think that’s just speculative… I agree with those who say that even the smartest people in Washington don’t really have the answers.
We won’t see a turn-around until investor confidence returns, and that will require some good news for investors. Thus far, not even a new president with bold economic plans has been able to restore confidence. It’s still early for Obama’s plan to work, but the forces that drive failure are still more powerful than those necessary to turn the market around.