An Inharmonious Chorus of Opinions
These days, those who put their money into any of the financial markets--stocks, bonds or foreign exchange--had better be prepared to take a roller coaster ride. This is because market sentiment no longer is steady and predictable. Rather, opinion shifts drastically, depending on the ebb and flow of economic statistics, major news events, the weather and developments in the Middle East.
In some ways, you can’t blame the markets for their confusion over the course of the economy. There is no unanimity of opinion among economists, either.
The conventional wisdom has it that 1988 will be another year of growth in the gross national product, with the GNP rising close to 2% after higher prices are factored out. However, a number of economists still think that this year will turn out to be somewhat worse; some still use the “r” word (recession) to describe what they believe lies ahead.
These conflicting opinions naturally lead to a chorus of comments each time a major economic statistic is released. The bullish economists interpret the numbers positively, as you might expect, while their bearish brethren see only the dark side. Depending on whose case is stronger, the financial markets will rise or fall--sometimes reversing a trend that got under way only weeks before.
To be sure, people should not think that these markets move only in straight lines--that they don’t zig and zag. Free markets will always, in the word of a respected banker, “fluctuate.” But there is a difference between the normal give and take among the bulls and the bears and the massive swings in sentiment--not to mention prices--that have been a regular feature of the financial markets since the end of last summer.
It’s hard to tell just what brought on these rapid-fire mood changes. Some say it was the departure of Paul Volcker from the chairmanship of the Federal Reserve, leaving the nation’s central bank in the hands of six relatively inexperienced people--all of whom were appointed by President Reagan and all of whom tend to speak their minds on the state of the economy, inflation and monetary policy.
Others point to our growing dependence on foreign funds to finance our domestic budget deficit, which has the markets worried that overseas investors might suddenly decide to put their funds somewhere else if our foreign trade deficit is too high, or if our domestic interest rates are too low.
Thus, anything that will influence these measures--ranging from economic strength (which pulls in imports and adds to inflation, thus widening the trade deficit and cheapening the dollar), to weakness (which does the opposite), to real or imagined changes in monetary policy--has market participants searching for the interpretation that they think will give them an edge over one another.
Who are these so-called “market participants,” you might ask, and how do they wield such power?
They are basically divided into two groups: traders and analysts. People in the first category do the actual buying and selling of stocks, bonds, money market instruments, currencies and commodities. Since their money--and, many times, their jobs--are on the line, they must form opinions quickly on any event or statistic that will affect a position they might have taken on their own behalf or that of a client.
Analysts, on the other hand, perform a more peripheral role. These folk sit on the sidelines and scrutinize every wiggle in interest rates, the money supply and other financial data in an effort to divine the course of monetary policy. Because they are so close, most times they cannot see the forest for the trees. Yet, traders solicit their opinions to help them form their own judgments.
Abetted by a cadre of financial journalists with daily columns to fill, these Fed-watchers many times attach policy significance to statistics where none exists. To compound the confusion, some produce weekly estimates of forthcoming economic and financial data--most of which tend to be wide of the mark. Depending on the direction in which this so-called “consensus” errs, the markets will go up or down, with the movements far out of proportion to the importance of the statistic.
I would be remiss if I did not also allude to the growing use of computers and such new instruments as index futures and options. This combination ensures lightning-quick trades for reasons having very little to do with economic or financial fundamentals. And, as you might have guessed, if one computer program says “sell,” others will, too, thus producing even more volatility. Market fluctuations have always been de rigueur on Wall Street, but roller coasters are something else again.
