It may seem like the sky is falling

Good day everyone!

It may seem as if the sky is falling. After all, in the last several days the financial markets have nosedived…especially yesterday. However, I really don’t believe that things are as bad as they may seem. First of all, I warned several blog postings ago that there is always a dearth of business news toward the end of a quarter (the 2nd quarter ends June 30th). What this means is that any news story has the potential to be over-emphasized as people look for an excuse to trade. That’s right, an excuse to trade. The stock market has many types of traders and among them are people who make money by trading and who do not really care if the market is up or down on a given day. No, what matters to them is whether or not they make money on an individual trade during the course of a single day. There are also traders who make money when the market declines, rather than when it rises. These include short-sellers, as well as hedge funds.

The bad news yesterday that sent the market down was an economic forecast by the World Bank that projected an economic recovery taking place further into the future than many people (apparently) wanted. However, it is important to note that the economic projections of a single institution, even if it is the World Bank, are just that: a projection. In other words, the big decline that took place yesterday was not based on facts, but one institution’s estimated facts. The bottom line is that new economic and business data is going to be released starting next week. It is likely that the 2nd quarter’s results will be pretty good. There were lots of indications in the quarter that the U.S. consumer rediscovered a penchant for spending a little bit of money. That means that many businesses are going to report numbers that are likely in excess of earnings estimates. Those sorts of surprises are generally the cause of many good stock market rallies. In turn, good news will likely create a bit more confidence in consumers, who then will spend a bit more. Etc.

I do agree with the World Bank that the recovery will likely take a long time. However, as we have discussed before on the blog, this is a good thing. The reason is that spending money and caution are a virtuous combination in my opinion. When caution is present then good investments are made by individual investors, institutional investors and businesses as they invest in new projects, products, and people.

Hang tough!

Jason