Moody Markets, or Manipulated Markets?

by | May 27, 2001

One of the things we often hear about the stock market is that it is an anticipatory animal, meaning that bear markets begin when the economy is good but people fear that things will get worse in the future, and that conversely, bull markets begin when the economy is bad but people expect things to […]

One of the things we often hear about the stock market is that it is an anticipatory animal, meaning that bear markets begin when the economy is good but people fear that things will get worse in the future, and that conversely, bull markets begin when the economy is bad but people expect things to get better in the future.

I think the truth is more complicated and sinister. I believe that the market is a “preticipatory ” animal, if I may be permitted to make up a new word to describe a phenomenon. What I mean by this is that I believe bear and bull markets are self-fulfilling prophecies — vicious or virtuous cycles driven by moods of pessimism or optimism (market psychology), which in turn are determined by external factors such as the Fed, the media, analysts, and energy prices.

I’m not saying that some of these external factors don’t impact the economy in a tangible way, some more than others. I just believe that their impact is often grossly exaggerated, and that as illogical as it seems, perceptions engender performance, rather than the other way around.

I know its an old argument: what came first, the chicken or the egg?

But just look at what has happened recently. The Nasdaq is up 41% since April 4 (still down 7% for the year, I hasten to add). I daresay we all are feeling a lot wealthier than we did six weeks ago and that because of that we are a lot more likely to spend money on goods and services that will hasten the economy’s recovery.

But I submit to you that the Nasdaq didn’t rally because there was tangible evidence that technology companies were doing better, or were even going to do to better in the next six months. Rather, it is now more likely that technology companies will do better in the future because the market has rallied on feelings of optimism about the future.

Why is all of this important?

Because if you subscribe to my view that bear and bull markets are largely self-fulfilling prophecies, you must pay homage to the people that have the money and / or power to change the mood of the markets. I’m referring specifically to the talking heads on CNBC and CnnFn, the analysts who get constant exposure on these programs, and a few influential cyber journalists.

It doesn’t matter whether or not whether these people are factual in their reporting. It doesn’t matter whether they make the effort to differentiate opinion from fact. The only thing that matters is that these people have the necessary exposure and influence to change the mood of the markets. You can hate these people if you believe they are deliberately manipulating markets to their own advantage, but ignore them at your own peril. And so, when Jim Cramer, who along with everyone else on his web site has been bashing technology stocks for a year, does an absolute overnight about face and becomes “nakedly bullish” on technology, to paraphrase him, you have to listen. You don’t have to like him, but you have to listen.

Copyright 2001 e-Broadband News. All rights reserved. E-Broadband News provides readers with news, commentary, and analysis pertaining to companies whose products and services increase bandwidth and storewidth for faster internet access.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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