The value of stock and bond markets is es-sentially the value investors put on the ex-pected returns of dividends/interest and thefuture value of the underlying investment.Since this total return on investment is anunknown quantity, investors anticipate, orhave expectations of, what the future valueswill be. (Short term traders have other mo-tives.)While, at any point in time, the value of amarket reflects the expected returns, mar-ket movement results from some combina-tion of two factors:
A change in those expectations, and/or
Fear or greed that a market has movedin one direction or the other too far,too fast.Looking back to the two most recent majormarket cycles for the S&P 500 (1995-2003and 2003-
2010), here’s what I observe:
From 1995 to around the middle of 2000, investors saw an explosion intechnology, especially use of the inter-net, and resulting productivity gains.The S&P rose at an annualized rate of over 26%
Then, in 2000, investors began to seethat many internet-related businesseshad no staying power and expectationsof never-ending productivity gains col-lapsed. Along with it, the S&P fell at anannualized rate of 28%
Then, around 2002-2003, the effects of easy creditbegan toshow up asconsumersbought eve-rything in sightat increasingly higher prices. The S&Prose nearly 14% annualized
In late 2007, reality set in that assetprices had gotten overextended andcredit was made available to many whocould not repay. The S&P fell nearly 70%annualized
Last March, investors came to the conclu-
sion that the recession’s impact on the
market was too extreme and governmentstimulus was on the way. A sharp cor-rection ensued as the S&P rose at a 75%annual rate (producing a 6.4% annual re-turn for the entire 15-year period).So, where does that leave us? Sensing thateach of the last 15 years of major marketswings in the S&P resulted from an unrealisticview of the underlying real value of the econ-omy, we are now left to discern what thatvalue really is
and put a price on it. How-ever, we are now in a period of great eco-nomic uncertainty. As a result, the market isvolatile, reacting quickly to news (and advice)that goes one way or the other
there’s plenty of it.
There are many implications for investors,
some of which I will try to address in ―MyBottom Line‖ on page 9.
What Moves Markets?
Stock Market Commentary .. by Ed Lane
Lane Financial Management
Special points of interest:
The market sold off in January. Is this tempo-rary or a new normal?
Q4 2009 GDP growthwas 5.7% but there wasless here than meetsthe eye.
Market momentummay be shifting to thedownside.
Investment focusshould be on emergingmarkets and income.
Inside this issue:
What Moves Markets
My Bottom Line