Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
The Social Challenge to Find Humanity in Capitalism - 5th Oct 15
Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference" - 5th Oct 15
Gold Rose 2.2%, Silver Surged 5.4% After Poor Jobs Number On Friday - 5th Oct 15
Gold, Silver Precious Metals: a Critical Week Ahead - 5th Oct 15
Stock Market Correction Still in Force - 5th Oct 15
Gold Price Change in Character - 5th Oct 15
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15
The Coming Corporate "Crime Wave" - 30th Sept 15
Stock Market Retracement May Have Run Its Course - 30th Sept 15
A Stocks Bear Market Is Now More Likely Than Not - 30th Sept 15
The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - 30th Sept 15
Junk Bond Market Imminent Collapse Threatens (Unwelcome) BIG Rate Rises - 30th Sept 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Financial Markets are Driven by Two Powerful Emotions, Greed and Fear

Stock-Markets / Stock Market Sentiment Mar 05, 2010 - 03:47 AM GMT

By: Puru_Saxena


Best Financial Markets Analysis ArticleA Weighing Machine - “In the short run, the market is a voting machine, but in the long run it is a weighing machine’ – Benjamin Graham

BIG PICTURE – The truth is that the financial markets are driven by two powerful emotions – greed and fear.  Essentially, during periods when the market participants are feeling cheerful and optimistic, they end up paying exorbitant prices for mediocre businesses.  On other occasions, when investors are feeling pessimistic about the near-term economic prospects, they price wonderful businesses at absurdly low valuations.  This manic-depressive behaviour has been consistent since the beginning of time and is largely responsible for the wild short-term gyrations in the financial markets.  

Look.  Over the short-term, stock prices are determined by the rapidly-changing emotions of the market participants which fluctuate depending on the news flow.  However, over the long-term, the fate of every stock is ultimately determined by the operating results of the underlying business.  Figure 1 highlights the close relationship between corporate earnings in America (orange line) and the S&P 500 Index (black line).  As you can see, over the past 140 years, the return from American stocks has almost mirrored the growth in corporate earnings. 

Figure 1: Long-term returns depend on earnings

Source: The ChartStore

During times of high volatility and great economic uncertainty, it pays to remember that stocks represent partial stakes in operating businesses.  Therefore, as long as the businesses you own are producing satisfactory results, it is best to ignore the market’s temporary appraisal of your holdings.

It is worth noting that during secular bull-markets, stocks outperform bonds and cash.  Conversely, during secular bear-markets, they produce disappointing returns.  Fortunately, secular bear-markets do not happen very often and they are always followed by lengthy and powerful bull-markets. 

In Figure 2, we have highlighted four secular bear-markets and four secular bull-markets which have occurred in the US over the past 140 years.  Now, it is interesting to note that with the exception of the 1929-1932 market crash (which coincided with the Great Depression), during all the other secular bear-markets, the S&P 500 Index lost roughly two-thirds of its value in real terms!  Even the most recent secular bear-market (2000-2009) produced an inflation-adjusted loss of 66%, which is remarkably consistent with the carnage of the previous episodes.  Therefore, in terms of magnitude, the most recent secular bear-market was almost identical to two of the three previous secular bear-markets. The only exception was the deflationary Great Depression which caused the S&P 500 Index to plummet by an astonishing 83% in real terms!

Figure 2: S&P 500 (adjusted for inflation) – 1870 to present

Source: The ChartStore

Given the fact that the most recent secular bear-market was similar in magnitude to most of the previous secular bear-markets, it is conceivable that it may have ended in March 2009.  If this turns out to be true, investors are in for a real treat! 

Now, before you dismiss our positive prognosis, you may want to note that every secular bear-market in the past was followed by a massive secular bull-market.  In fact, the previous four secular bull-markets produced the following inflation-adjusted returns:

  • 1877-1906               -          (+) 433%
  • 1920-1929               -          (+) 530%
  • 1932-1968               -          (+) 1008%
  • 1982-2000               -          (+) 874%

So, if we are indeed in a new secular bull-market, stock portfolios are likely to produce spectacular inflation-adjusted returns over the following decades.

Even if our assessment is off the mark and the S&P 500 Index drops below the March 2009 low in inflation-adjusted terms, we doubt if it will make a new nominal low.  In our view, the central banks’ ability to create even more money will prevent the S&P 500 Index from falling below the 666 level recorded in March 2009.

The reality is that we live in an era whereby currency debasement is a certainty.  Whether you like it or not, under the current monetary system, inflation is unavoidable.  And in a perverse manner, money creation increases nominal corporate earnings; thereby assisting stock prices over the medium to long-term. 

Thanks to the consequences of monetary inflation, prices rise over time and this phenomenon gives a boost to the future cash flows of companies.  So, even if a company does not succeed in increasing sales and profits through an improvement in its business, with the passage if time, its nominal earnings gets supercharged due to the inflation tonic. 

Now, bearing in mind that stocks in the US have already lost two-thirds of their real value over the past decade and the fact that money-printers are running the economic world, it seems likely that stocks will continue to appreciate over the following years.  Furthermore, if our assessment is correct, stock markets in the fast-growing developing nations will continue to outperform the ‘developed’ world. 

After reviewing the macro-economic data, we are convinced that Asia will provide economic leadership and nations such as China, India and Vietnam will climb the prosperity ladder over the following years.  Accordingly, we are holding on to our long-term investment positions in these countries and it is our conjecture that our companies will produce solid growth over the following years.  

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from

Puru Saxena

Website –

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2010 Puru Saxena Limited.  All rights reserved.

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


11 Mar 10, 00:36
It's Not Fear and Greed

Markets are not driven by fear and greed. They're driven by Goldman Sacks America and JPM.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History