Wednesday, September 17, 2008

Stock Market Falls

I've been taken aback at how many people are worried about stock market falls. It's legitimate to be worried about the banking system and whether the American crisis will ruin the world banking system, but to worry about the stock market?

Stocks go up and down. During the crash the FTSE went from 6900 in Jan 2000 to 3287 in March 2003. By contrast the current bear market (peak 6706 in Oct 2007 and 4912 today) is mild, and clearly has much further to go. 2003 wasn't that long ago, have people such short memories?

Markets have also been known to be flattish for extensive periods of time. The Dow Jones for instance was flat from 1937 to 1950, and then flat again from 1966 to 1982, and the 1950 to 1966 rise was very shallow indeed (you'd have been better off sticking your money in a deposit account). Yet America was booming from 1938 onwards as they supplied all the armaments for WW2 and didn't suffer any domestic destruction, plus came out of WW2 as a stonking superpower (in the 50's and 60's the USA ran massive budget and trade surpluses and had nearly 50% of the world's GDP). By contrast the Dow rose very sharply in the 1920's, but the underlying American economy then was nowhere near as strong as in the 40's, 50's and 60's.

Go-go markets have more to do with fear and greed than anything else. Essentially the stock market is a giant casino. Witness the go-go market in oil for instance. Did fundamentals really justify the $147 per barrel in July, or is the $90 now more reflective of the world economy? And that drop in oil price will have also taken out those speculators who thought the price would go to $200 per barrel - but the oil bear market is actually beneficial to the real economy.

I think the trouble is that too many people think that stock markets can go only one way and lots of people who invest in them simply don't understand the nature of the gamble they are taking. If you really want financial security, you'd be better off overpaying your mortgage - people pay way more in interest over the term of their mortgage than they did on purchasing the property in the first place. But it's funny how no financial advisor ever recommends that simple solution.


Anonymous said...

When I was Very Young reports about stock markets were broadcast only on an obscure radio programme called "Market Trends" that was broadcast on an obscure BBC national radio station called Network Three (which used the Third Programme's transmitters for about an hour in the early evening before that highbrow station started up at about 7:30pm). Most people with money to invest put it in a savings bank or building society.

Now market reports from around the globe are headline news and dimwits can find relatively easy work as "financial consultants" selling all sorts of wizard schemes.

Which was the more sensible arrangement? Discuss!

snowflake5 said...

I can see why broadcasters like to focus on the stock market - plenty of dramatic flashing screens, plus charts of things going up and down, plus shots of people looking very worried as they stare at five screens at once! It's good television.

But there is of course more to capitalism than the markets. For a start lots of businesses are not listed on the stock exchange. There still exist lots of family businesses - SC Johnson who make Mr Muscle come to mind, as do the Mars chocolate group - who are private companies not listed on any exchange and can therefore take the long view. Plus the myriad of small businesses and sole traders who make up the backbone of UK plc. But because they can't be televised, they are simply ignored as though they don't exist.

Mark Wadsworth said...

I always tell people that paying off their mortgage as quick as they can is way better than pensions or shares or anything else. But there again, I'm not a financial advisor. Another tip is, sell your property ASAP and buy it back for 25% in a few years' time.