Uncertainty Makes the Stock Market Crazy

Thursday, October 09, 2008
What moves the stock market?

That complex question has many answers. Some market movers are obvious, while others creep up on us unseen. In this and subsequent articles, I’ll look at some of the economic, political, and societal issues that may cause the market to change direction or speed up or slow down its momentum.

A quick list of the obvious includes:

* Inflation
* Interest rates
* Earnings
* Oil/Energy Prices
* War/terrorism
* Crime/fraud
* Serious domestic political unrest

As you can see, many of these have serious long-term implications, while others may only cause temporary disruptions.

However, the one factor not listed above that drives the market absolutely crazy is uncertainty. The market cannot stand surprises and when there is the chance that something may change, it rattles the market.

There is a theory that our stock markets are “efficient,” meaning that everyone has access to the same information at the same time. Of course, this is not true, but in a broad sense, the market taken as a whole expects to know about events and news in time to absorb them.

For example, if the Federal Reserve Board’s Open Market Committee (the Fed) expects to raise interest rates by one-quarter percent at its next meeting, the market will absorb and factor that rate increase into prices before the committee meets. If the committee follows through as expected, there is usually little or no market response. However, if the Fed raises interest rates by one-half percentage point instead, the market will probably react abruptly.

Surprising economic news, war or terrorism, and other unexpected events disturb the markets sense of control and often send it in a tailspin. Of course, really good news can cause a big bump in prices, but it seems like these days it’s bad news that captures most of the headlines.
What Does this Mean to You?
For most investors, these market bumps are just that – temporary bumps that soon smooth out. However, you need to be aware of the factors that move the market, since they can create opportunities as well as problems.

If you have had you eye on a stock, but felt it was a little over-priced, one of these market events might just take enough wind out of its price to put it in your buy range.

On the other hand, if you need to sell, watch for earnings reports, Fed meetings, and other predictable events that might shave some points off your stock.


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