Buy! No, Sell! Wait…Buy…er, Sell…Sell it All!

Today's guest post is by long-time stock market watcher and long distance cyclist, Peppercommer Matt Purdue.

Teen-burgalar-heats-baby-bottle-250In public relations, the first rule is simple: the more you know about your client's business, the more valuable you will be to your client. So what are they concerned about? Right now, almost every business if freaking out at least a bit over what's happening in the world's financial markets.

The stock markets are hopping around like a kangaroo with ADHD, and no one seems certain where they're headed next: up (bull) or down (bear).

So what's going on out there? Let's discuss.

Assumption #1: if demand increases for a finite thing, the price of that thing will rise. Well, everyone knows the world economy has been having a hard time getting back on its feet since the global meltdown that began in 2006. So to help the economy, the US Federal Reserve (the Fed) has essentially been printing money to buy bonds — $85 billion worth of bonds each month. The Fed is thus creating artificial demand, which keeps the prices of bonds and other assets such as stocks rising (see Assumption #1).

And rising asset prices are supposed to make the companies and investors that own these assets more confident. Ideally, this will spur them to spend money, hire more workers, produce more widgets, build more buildings and, thus, boost the world economy.

Well, the Fed can't keep buying bonds forever. At some point, the baby has to give up the bottle and hit the sippy cup. Someday, the Fed will decrease and stop its bond-buying program. The BIG question is when. When will the Fed dial down demand? And when it does, will asset prices fall…and destroy confidence?

This week, the Fed chairman, Ben Bernanke, suggested that the Fed could slow its bond buying binge later this year and end it in the middle of next year — if the economy continues to improve. After Big Ben's press conference, the markets reacted…er, overreacted. Mommy told the baby that someday she will have to give up the bottle and use the sippy cup…and now the baby is going apesh*t, throwing its toys and screaming its bloody head off.

In the U.S., the Dow Jones Industrial Average fell more than 500 points last Wednesday and Thursday. Stocks around the world also pummeled. So what's next? It's hard to guess. As I write this on Monday morning, the Dow is down another 1.5%. If I were a betting man, I'd wager on more volatility in global markets until investors have a better idea of which way the wind is blowing.

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