The stock market does not respond positively to the corporation earnings of last quarter the majority of which show improvement in profits despite some decline in revenue. Normally the increase in profitability should drive the stock price higher to maintain the same P/E ratio. However actual equity market movement is the opposite. This indicates that short term market trend is manipulative and may not be directly correlated to corporation operating conditions.
The excuse for the stock market to decline is the disappointed revenue growth in many business sectors. In addition, the tone of Federal Reserve Chairman immediately sent stocks tumbling. Traders with pessimistic sentiment successfully push down the index. This indicates the unpredictable nature of stock movement and thus the consideration for an investment decision on speculative stock trading is less dependent on corporation performance but rather on the action of market participants.
However, in the long run stock valuation would reflect the earning capability of the company. Short term fluctuation in stock price is due to trading activities of diverse market participants. As discussed earlier, technology improves significantly the living standard of human being. And innovations in science and engineering has never stopped. This results in the increase in productivity of agriculture and manufacturing and thus corporate earnings.
The economy is expanding with the increased productivity and thus the accumulation of wealth in the human society. This is a regenerative process. However, the shock wave of financial crisis reverts the wealth accumulation process. Consequently the economy shrinks due to decrease in consumer spending as a result of wealth destruction. Governments are attempting to restore economic growth by encouraging consumer spending but not very successful. Consumers are spending less due to wealth destruction as well as job loss.
Traders take the opportunity to make profit from equity market by driving the market down. The high volatility and volume in the equity market during the financial crisis indicates the participation of corporate and retail investors.
Although economic growth suffers temporarily during the financial crisis, the trend of technology driving living standard has not been changed. Corporations see a decline in revenue growth and thus earnings. However, companies attempt to maintain profitability by means of improving efficiency, in other words, company downsizing. This creates a social problem.
It is unknown when the shock wave of financial crisis will fade away. Traders keep on using various excuse to manipulate the stock market despite the fact that eventually economy will resume growth which is driven by technology. Structural change in the economy may cause social problems. The private and national debt may also be concern of the society. Although these factors have little impact on actual economic growth, they are excuses for short term market movement.
There is a financial blog site, http://maseportfolio.blogspot.com/search?updated-max=2010-06-23T07%3A42%3A00-07%3A00&max-results=7. In the post dated Tuesday, June 15, 2010, titled Bubble, Bubble...Where's the Bubble?, it mentions current companies financial status and the enormous wealth of investors to manipulate the equity market.
“The Federal Reserve reported Thursday that non-financial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.”
Just one other point on this: I believe that what is happening in European financial markets is a part of this “bubble” activity. International investors are not acting like they are scared and strapped for funds. Their aggressiveness, to me, indicates that they are flush with money and hence have the confidence to be aggressive in attacking the financial condition of euro-zone countries on the sell-side. Investors “in dire straits” do not take on sovereign nations. This indicates, to me, that there are plenty of “well off” investors in the world that can move money around and “make things happen.” The European situation is a result of the U. S. “quantitative easing”. Further “quantitative easing” just exacerbates the problem!
No comments:
Post a Comment