The Meltdown Continues

If you have interests in the American financial system, which includes practically all of us, October has been a schizophrenic ride not for the faint of heart. Probably the most telling point is when a 300 point drop or gain in the market has become ho hum. The wild swings, not only in the domestic market but in foreign markets as well, have been trending significantly down for the last several months. I will make an attempt to explain this.

The stock market is one of the purest form of capitalism we have. The price of stocks is determined by demand, or what another person will pay for it. You can do all of the fancy analysis as to value you want but a share of stock will only get that in a sale if someone with the cash to buy it thinks it is worth it. Secondly, investors buy a stock trying to predict how the perceived value of that stock is going to grow. Many factors go into that prediction but taking cash from your money market account and purchasing a stock or mutual fund requires a great deal of confidence and faith in the overall financial systems. Obviously the confidence levels out their are not high so many people, fearing loss, pulled their money out of the market and are not putting it back. Therefore when someone looking to sell their pool of buyers is significantly smaller than it would be if the billions of dollars on the sideline were out there seeking investment opportunities. So when someone on Monday tries to sell a mutual fund valued at $20 per share but the best offer is $18 it sells for $18 or less. Less because timing is crucial and computerized trades seek to sell these shares as quickly as possible. If that person looking to buy is tentative about it the computer seeks to find a buyer at whatever offer is out there. Multiply this example by millions and you see why it really takes very little to drive the market one way or another.

The biggest driver of the market today is uncertainty. The perceived differences in where the winners of the election of November 4th will take the country has the market in turmoil. Remember, the market is trying to factor in everything to predict the future and when you have such significant difference between the Democrats and the Republicans it is hard forecast the impact of the election. Also the mixed messages of the 24/7 media add to the turmoil. So until the election is settled and the country has decided which way the government is going to go expect another couple of weeks of turmoil. Regardless of who wins having the final determination will as least give us a blueprint to work from and we can go about trying to predict the future with a little more certainty. Meanwhile, where the bottom is nobody knows.