The weight of uncertainty in the markets
The weight of uncertainty in the markets
The weight of uncertainty in the markets
The markets are known to most participants as a discounting mechanism. The price of a stock or commodity takes into consideration all factors supposedly known at a given time and produces valuation. This would include all known information, period. This is known as efficient market theory (hypothesis).
What the theory can't take into effect is the public's response to information and how that may affect price activity. The public's reaction to information will be unique, to a given event. Much depends on the background of the market, the general consensus of risk and how it should be valued. Some may argue that these factors too are taken into consideration by the investing public as a whole and that it reflects the sentiment of the time.
Prior to the banking crisis there were a few on wall street who were sounding the horn attempting to warn the regulators and public of the impending disaster. Most if not all of these "Alarmists" were discounted by the press and politico's. The Bush administration warned congress on several occasions that the current policies towards lax lending standards were putting institutions like Fannie Mae and Freddie Mac in jeopardy. Their warnings were not heeded and the system imploded under the weight of public speculation in real estate and poor quality loans made easily available to person's who lacked the resources to pay back their obligation's.
This information was widely known, yet widely ignored, at the same time. The information was known and even though it was accurate it was discounted, generally, as absurd Choosing to ignore the facts became a method of inflating the value of these assets rather than acting as a discounting mechanism. Once these facts became too obvious too ignore, any longer, the market began to correct itself and valuations began to fall rapidly.
That the facts were ignored for so long made the correction sharp and severe. Had the market truly been discounting the facts, all along, there would have been no dramatic response to the financial crisis. In fact if efficient market theory were true then prices would seldom fluctuate and would only move modestly in one direction or the other.
The fact is that markets are seldom efficient and should not be seen in that light. The markets are a mechanism of price discovery that occurs through speculation. The very fact that prices move so dramatically during one hour, one day, one week, or one month tells us that speculation is not efficient and that it is a volatile response anticipating continued valuation in a given direction (up or down).
If enough market participants agree upon, speculate commit, to a given direction for a stock or commodity then that intent will continue to drive prices in that direction. Early entrants may get out sooner than others who were late to the party, as profit projections are met, thus making corrections in price inevitable along the way to the eventual high or low of the run.
Each group of market participants has a different idea about how they value a company or commodity and this fuels their buying or selling activity. The weight (wait) of uncertainty surrounding expectations tends to put a lid or a ceiling on speculative activity. Without a clear sense that the economies, surrounding a stock or commodity, are improving it is unlikely that investors will become enthusiastic enough to increase risk exposure and bid prices higher. This is evidenced in range bound markets after a market has seemed to bottom or sometimes near a top which develops a range of price activity.
In the late 1990's there was little uncertainty in the markets as equity prices rose in line with that lack of fear. The less fear in the markets the higher prices rise. The more fear in the market the faster prices fall. Hope and fear drive the markets directionally. Uncertainty creates an inertia that acts like a rubber ball bouncing. Once dropped it bounces a little less each time it hits until it settles down and stops.
Markets never stop moving completely. They may slow and stall briefly for a time. Individual stocks may move very little over a period of weeks, months, or years depending on the prospects for the underlying security.
As profit expectations are reached investors begin to sell in a rising market, as losses begin to accumulate selling accelerates in a falling market. It is the, simple yet inevitable, temporary balancing of these forces that create sideways trading markets which reflect the weight of uncertainty that creates a wait and see attitude going forward.
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