Stock Market: A Tug Of War

(Drivebycuriosity) - There is a tug of war on the stock market: Gamblers, who are betting against the economy, are fighting investors. The struggle causes the huge swings we saw on the US stock market this week.

The investors have the fundamentals on their side. The US economy is still solid and is growing about 2,7% in the fourth quarter of 2018 ( frbatlanta.org). Jobless rates & weekly jobless claims are close to all-time lows and company earnings are climbing more than 20% annually. Companies are benefiting from a new industrial revolution: Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets. Lower oil prices (minus 40% since summer) and reduced taxes are generating tailwinds and China`s economy is still advancing 6% plus.

The gamblers, also called skeptics or bears, have the negative sentiment on their side and the pessimistic zeitgeist. Negative thinking is cult and regarded as smart. And the future is supposed to be bleak. The majority of movies which are regarded as science fiction are dystopian:  Hunger Games, The Road, Divergent, Oblivion, Equilibrium, The Giver and many more. It´s the same with science fiction books - especially those catering the young adult. And many predictions on Bloomberg and other finance sites are dystopian too. "America´s Millennials will wake up to a grim to a grim future", claims Bloomberg (here my comment)!

As a result herding behavior ruled in the recent days again. Falling stock prices created fear and induced more people to sell. The crowd of fund managers and other so-called professional followed blindly some skeptic bellwethers and the notorious scaremongers. Professional portfolio managers, including administrators of large funds, usually act as a herd. When their bros are selling they are selling too which amplifies the stock market movements. The recent slides animated many fund managers - and others - to take profits, apparently this encouraged short sellers to amplify their bets against the stock market. So the slides accelerated, causing more selling - a typical herd behavior. Falling stock prices also triggered stop-loss-orders. Many professionals set these sell orders to prevent further loses. Falling stock prices also triggered some computer programs to sell, aggravating the snowball effect.

In the long run the investors win! The graphic above shows that the US stock market, represented by the S&P 500, grew on average annually 6.7% since 1950, even that dividends are not included (annually 2-3%). Investors who reinvested their dividends got an even higher return. The University New York calculated that since 1928 the US stock market (S&P 500) created an average return of about 10% p.a (stock market gains plus dividends reinvested nyu.edu/ investopedia). So an investment into the stock market doubled its value every eight years, thanks to the interest compound effect (compound).