The Market Has Tanked….Again
The news is definitely not good for the markets. We have an enormous amount of stock-price volatility, and the Dow is well below its recent high. Take this quote from economist Mark Zandi:
Stock prices are falling across the globe. The Dow Jones Industrial Average fell 550 points or just over 7%…and is now 13% below its all-time record high set this past summer. The decline in other broader market indices, including the S&P 500, NASDAQ and Russell 2000 has been similar.
Interestingly, Zandi said this back in 1997 (if you sign up for the trial, you can get the full article here). The ellipsis in the quote replaced the words “on Monday , October 27, 1997.†My point is not that we aren’t currently in some sort of tumultuous period. It seems pretty clear that we are. We just have to keep things in perspective.
I’m not really sure if this will work, but I’m going to follow Andy Kessler’s advice and ignore the markets until February. Kessler gives several valid reasons for the recent wild swings in the market, and I suppose he could be correct. Either way, there’s very little I can do about the market, and I’m young enough to maintain a long-term view.
On the positive side for economists, we may have a new opportunity for researching the (somewhat) controversial contagion theory. The name comes from the psychology of crowds; it basically refers to a sort of herd mentality. In the context of the stock markets, once a few big investors get spooked and/or a few large companies’ stocks go down, the herd mentality kicks in. For this theory to be true, the drop in the market could have started based on very real events. The contagion just makes it worse.
There’s actually a pretty good analogy here for the way the financial crisis started. This article, Anatomy of a Meltdown (it appeared in the October 2007 issue of Mortgage Banker Magazine), details some of the intricacies behind the subprime problems. Bear Sterns, for example, probably got into a great deal of trouble due to a herd mentality. Nonetheless, Bear did get into trouble. Hopefully, all of this will be over by February.
NM