Best of the Week
Most Popular
1.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
2.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
3.Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - Nadeem_Walayat
4.Scotland Independence Result NO Win 55% to Yes on 45% - Nadeem_Walayat
5.US Dollar Forecast to Go Much Higher - David_Petch
6.Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - Raul_I_Meijer
7.The Emergence of the US Petro-Dollar - Gary_Dorsch
8.Don't Miss This Gold Buying Opportunity - Brien Lundinr
9.Silver Price: A Collapse and a Rally - DeviantInvesto
10.Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14 - GoldCore
Last 5 days
Tesco Super Market Giant Fast Disappearing Down a Financial Black Hole - 22nd Sept 14
Where China and Japan Are Investing Billions - 22nd Sept 14
Scotland YES 71% - Global Youth Intifada Moves On - 22nd Sept 14
U.S. Dollar: The Last Hurrah? - 22nd Sept 14
China Moves To Dominate Gold Market With Physical Exchange - 22nd Sept 14
One Giant Cluster Ponzi - 22nd Sept 14
The Millenial Cult Of Global Warming - 22nd Sept 14
Dubai Residential is NOT a Property Bubble But the Party’s Over - 22nd Sept 14
Stock Market Topping Process Update - 22nd Sept 14
Indian Stock Market BSE SENSEX The Encore Rally - 21st Sept 14
ISIS Fear-Mongering Ahead of Another US False Flag? - 21st Sept 14
Ecology Politics And Haeckel's Tree Of Meaning - 21st Sept 14
ASX200 Stock Market Index Set For New Highs - 21st Sept 14
Scottish Referendum Not Avoiding The Future - 21st Sept 14
Five Lessons Learned from the Scottish Referendum - 21st Sept 14
The Problem With UKIP And Other I I P's - 21st Sept 14
Stocks Bull Market Resumes - 20th Sept 14
Gold And Silver - Current Price Is The Story - 20th Sept 14
Can the U.S. Economy Withstand Another Housing Market Breakdown? - 20th Sept 14
Nervous Investors Will Hate the Money You Make With This Strategy - 20th Sept 14
Cheap Gold Stocks Upleg Intact - 20th Sept 14
Monetary Policy Killing The System - 20th Sept 14
Scotland and the Spirit of Our Time - 20th Sept 14
Bitcoin Price Charts In-Depth Analysis - 19th Sept 14
Alibaba is Focused, Will Use Money in Emerging Areas - 19th Sept 14
Bird's Eye View of the Gold Stocks - 19th Sept 14
Scotland Independence Result NO Win 55% to Yes on 45% - 18th Sept 14
Silver Price: A Collapse and a Rally - 18th Sept 14
Here's Why Trendlines are Your New Trading Best Friend - 18th Sept 14
Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14
The "Hidden" Billions in the Alibaba IPO - 18th Sept 14
Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - 18th Sept 14
Monetary Policy Weighs on Gold and Silver - 18th Sept 14
Global Currencies Analysis...The World According to Chartology - 18th Sept 14
Gold Price Hammered by Strong U.S. Dollar - 18th Sept 14
Is Citigroup the Dumbest Bank Ever? - 18th Sept 14
Scotland Must Vote Yes! For All Of Us - 18th Sept 14
Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - 18th Sept 14
A Public Bank Option for and Independent Scotland - 17th Sept 14
The Charade of Independence for Scotland and UKIP - 17th Sept 14
Gold Report - U.S. National Debt Surges $1 Trillion In Just 12 Months - 17th Sept 14
How to Find Trading Opportunities in ANY Market Using Fibonacci Analysis - 17th Sept 14
Why Money Is Worse Than Debt - 17th Sept 14
Can Gold Price Finally Recover? - 17th Sept 14
Scotland Independence - Europe Holds Its Breath - 17th Sept 14
The Energy Prices at Risk with Scottish Independence - 17th Sept 14
Scottish Independence SNP Lies on NHS, Economy, Debt, Oil and Currency - 17th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

You've never seen this before and may never again

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.


© 2005-2014 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

Free Report - Financial Markets 2014