Best of the Week
Most Popular
1.The Trump Reset, US Empire's Coming Economic, Cyber and Military War With China (2/2) - Nadeem_Walayat
2.Now Is the Time to Buy Gold - 5th Jan 17 - John Grandits
3.CIA Planning Rogue President Donald Trump Assassination? Elites "Manchurian Candidate" Plan B - Nadeem_Walayat
4.The Trump Reset - Regime Change, Russia the Over Hyped Fake News SuperPower (Part1) - Nadeem_Walayat
5.Most Popular Financial Markets Analysis of 2016 - Stock Market Crash Postponed Again - Nadeem_Walayat
6.No UK House Prices Brexit Crash 2016 Despite London Weakness, Forecast 2017 - Nadeem_Walayat
7.President Trump Understands the NSA, CIA... LIE, America's Intelligence Agencies Crime Syndicate! -Nadeem_Walayat
8.President Donald Trump's 2017 New Year Message, BBC Fake News, Was 2016 a Dream? - Nadeem_Walayat
9.Major Stocks Bear Market Still Looms - Zeal_LLC
10.Biased 2017 Forecasts - Debt, Housing and Stock Market (1/2) - James_Quinn
Last 7 days
The Trump RESET Starts on US Presidential Inauguration Day 2017 - What to Expect - 20th Jan 17
Will the CIA Assassinate Rogue President Donald Trump Like JFK? - 19th Jan 17
Bonds, Dollar, Stocks, Gold, Silver Major Markets at Turning Points - 19th Jan 17
Populism; the Danger? What About Debt? - 19th Jan 17
Gold Price 50-DMA Breakout - 19th Jan 17
Turkey, 'Axis of Gold' and End of US Dollar Hegemony - 19th Jan 17
The Most Important Market Chart on the Planet - 19th Jan 17
Trump Deficits Will Be Huge - 19th Jan 17
Stock Market Trading Patience Pays Off with CHK Using Momentum Reversals - 19th Jan 17
Gold - How to "Buy Low and Sell High" Like a Pro - 19th Jan 17
State of the Global Stock, Financial and Commodity Markets Report 2017 - 19th Jan 17
The Hunt for Russia's Next Enemy - 18th Jan 17
Returning Gold Bulls - 18th Jan 17
Biotech Breakthrough Could Create A $11.4 Trillion Opportunity - 18th Jan 17
Bitcoin and Gold - Outlook, Volatility and Safe Haven Diversification - 17th Jan 17
Stock Market Uptrend on Borrowed Time - 17th Jan 17
The One Stock to Retire On - 17th Jan 17
Trump anti-Communist Counter Revolution - 17th Jan 17
US Stock Market Update as the Trump Inauguration Approaches - 17th Jan 17
The American Crisis - Common Sense 2017 - 17th Jan 17
Obama Leaves, Hope Arrives, Will Stupid Stay? - 17th Jan 17
Damage Inflicted by Precious Metals Manipulation Is in the “Multi Billions” - Keith Neumeyer - 17th Jan 17
Gold Price Forecast 2017 Update - Video - 17th Jan 17
The Story of the U.S. Regime Change Plan in the Philippines - 16th Jan 17
Gold Price 2017 Trending Towards $1375 as Forecast - 16th Jan 17
'Deep State' CIA Director States We are Not NAZI's, Warns Trump Does Not Understand Russian Threat - 15th Jan 17
UK House Prices Forecast 2017 - Crash or Bull Market? - Video - 15th Jan 17
SPX Stocks Bull Market Update - 14th Jan 17
President Trump vs the Deep State that Hides in Plain Sight - 14th Jan 17
The Impact of Sir Alex Ferguson's Retirement on Man United's Share Price - 14th Jan 17
What Can Stock Market Tell You About Politics? - 13th Jan 17
Big Gold Buying Coming 2017 - 13th Jan 17
A Bullish Case for Gold 2017 - 13th Jan 17
Will Stocks Bull Market Continue to Charge or is it Time to Sell the News - 13th Jan 17
Gold and Silver Off To Shining Start to 2017 - 13th Jan 17
Gold’s Fundamental Outlook for 2017 - 13th Jan 17
Is trading stocks and shares just as luck-based as roulette? - 13th Jan 17
Trump CIA Like Nazi Germany - Fake MI6 Intelligence leaked to Fake News Mainstream Media - 13th Jan 17
USD in Decline. SPX and TNX May Follow - 12th Jan 17
CIA War On Trump - Leaks Fake MI6 Intelligence to Fake News Broadcast Media - 12th Jan 17

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

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

Stock-Markets

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 www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

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.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Albertarocks
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

Catching a Falling Financial Knife