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Archive for September, 2014

5
Sep

Financial markets fluctuate

Discussions in articles, books, studies and commentaries from different sources have some common elements about investing.  Investing is discussed in different contexts.  Examples of the different discussions include: performance, risk, retirement, budgeting, goals and government policies.

An example is an August 15th New York Times article:”Fears of Renewed Instability as Fed Ends Stimulus”.  The article reflects a conversation with Jeremy Stein, who left the Fed’s Board of Governors at the end of May to return to Harvard’s economics department.

Many investors are getting nervous because of the length of good stock and bond performance.  Recent fluctuations are a reminder that markets go down as well as up.  Maybe the recent gyrations are signs of impending instability.

Referring to the Federal Reserve (Fed) actions the article discusses the possible unintended consequences of the Fed policies that have guided us through the recent financial crisis.  The low rates have resulted in investors reaching for yield.  The consequence of reaching for higher yield is increased risk.  Some investors may not realize the increased chance of losses.  The result could be further strain on our economy.

The author of the article, James B. Stewart, included the following:

The Princeton economist Markus K. Brunnermeier, an expert on asset bubbles and crashes, has identified what he calls “synchronization risk,” a phenomenon in which investors ride a wave of price increases even if they realize the assets are overpriced.  “It’s what economists call a lack of common knowledge,” he said.  “We may all know an asset price is too high, but we don’t know the others know it, too.  Timing is everything.  The danger is if you move too early and the market doesn’t follow up.  So everyone waits on the sidelines watching and listening,”  as long as asset prices keep rising.  The danger comes when they all try to get out at the same time.”

“No one wants another crash, but a garden-variety correction may be just what’s needed to avoid one in the future.”

The discussion recognizes that the market fluctuates.  Frequent and/or large fluctuations indicate concern about the future direction of the markets.  No one thinks they know what direction the market will go when it fluctuates.  Investors are cautious when the market gyrate.  They become optimistic when the market continues to rally.  This is when investors become confident and make mistakes.

Economists, journalists, regulators and politicians are all poor forecasters of the future movement of the markets.