"Market confidence" is a phrase we hear in the media so often just now, especially with such uncertainty in the Euro zone. Confidence is such a wholly human trait - defined as ‘firm trust’ and as such is a variable that is hard to control, predict or measure. Everything else in life has been refined and improved over time but the stock markets remain controlled by the vagaries of human emotion as they did when they were first opened.
I do find this contrary to our approach to most other things in life. Cars were invented back in 1885 by Mr. Benz and have been refined greatly since then - they do the same thing now that they did back then - only better and in a more efficient way. The same, it seems, cannot be said about the stock markets. Whilst the tools used in conducting market trading have changed dramatically since they began - from face-to-face to ticker tape to computers - not much else has. I often wonder what would happen if Google got their hands on the stock markets. They wouldn't stand for such imprecision or uncertainty. They'd engineer out such variables and craft an algorithm that provided a balanced sustainable system where everything was measured and accounted for and the resulting process would see an equitable meritocratic system established that everyone knew and understood and could access and benefit from.
The concept of Efficient Market Hypothesis tries to determine that only changes in fundamentals such as the outlook for profit levels will affect shares prices beyond the short-term. Yet the Dow Jones crash of the 19th of October 1987 is attributed in part to market psychology, an event that was the largest ever one day fall in the Dow Jones Index’s history. Further psychological factors include the impact of group thinking which accounts for our social norms such as needing self-confidence nor being left behind so when one market trader starts dumping shares, others tend to follow. Mass panic (or euphoria in a positive situation) can follow and hysteria can set in. The chart below outlines how interest levels and dividends have been relatively flat and how stock prices and earnings have fluctuated.
When I hear news reports detailing the impact of fluctuations in the market caused by ‘uncertainty’ in a particular currency or lower than expected sales results from a major corporation ‘shaking confidence’ it does bring a rye smile to my face - and continued exasperation. Why is something so vital to our lives left to something so unpredictable as human behaviour...?
One of my favourite movies of all time is Inside Job which tells the tale of the recent banking crisis and how it was down to the frailties of human emotion, in this case pure greed, and is a timely warning of how susceptible our global economy is to human-led change and that vigilance in future is essential.
