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01 Feb 2012

Market Misconceptions

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Market Misconceptions

Blog Date: 11/09/11
Author: Eric Haslbauer, Accounting Major
Despite all of the negativity presented in the media, there seems to be little attention focused at the positive. For instance, many don’t even know that the Dow Industrial Average finished the month of October with its biggest advance since 1987!!!! The Dow finished at about a 14% increase for the month!
The Wall Street Journal contained two rather interesting articles which discussed this topic. The first, entitled “Brighter Mood Buoys Dow Rally”, was published on October 22, 2011, and it discussed how the Dow finished that week in positive territory, its longest such run since January. The article discussed that hope was the main reason for the Dow’s success. It explained that US companies that have impressed analysts by surpassing profit expectations as well as the meetings of the EU involving the Greece crisis have contributed to this growing hope in the market. Rebecca Patterson, the chief markets strategist for JP Morgan, summed it all up saying, “There are a few factors at work here, and they’re all hope-based.” At the start of October, stocks were falling to there lowest in over a year (close to a bear market which is defined as a 20% decline from a recent high). The S&P 500 finished the week of 17th up 9.4%. The article centered upon the aspect of attitude and how it is a key to success. Without the thought of success or even the belief of the possibility of success, you have already counted yourself out before the “race” even started. Being an avid runner, I can really relate to this statement. While anxiously standing on the line for the gun to go off, you must genuinely believe you are going to run well. If I don’t believe in my abilities and have a poor attitude about the race, I can count myself out before the race even starts because of my mental perception. Success is partially a mental game requiring physical performance as well as psychological aptitude. The article concluded with another quote by Rebecca Patterson which clearly illustrates the situation, “I wouldn’t claim victory yet. I would love for hope to stay around for a while and there’s a good chance that it could, but until I see the details from Europe, I’m convinced that the trend has not changed.”
The second article in the Wall Street Journal was entitled “Stocks Cap a Big Week with Gains.” It was published on October 29, 2011 and also discussed the surprising gains in the Dow. It explained how the week’s gains came just after the 300 point surge which investors claimed was due to the European plan to combat Greece’s debt issues, expand a bailout facility, and recapitalize the region’s biggest banks. Investors are also shifting their attention from Europe to the U.S. and how 300 plus companies on the S&P 500 have reported earnings well above analysts’ expectations. Likewise, the focus has migrated toward Congress’s so-called super committee on deficit reductions which is supposedly going to decide on budget cuts by Thanksgiving weekend. All of these facts have contributed to the Dow’s success as the article explained. Similarly, the S&P 500 is on pace to reach its first month without a back-to-back decline since October 2006.
Overall, these two articles exhibit how the Dow is still experiencing success despite the negativity in the media. However, despite all of these positive gains in October, questions still remain regarding how Europe will implement its plans and whether these plans will be enough to resolve the debt crisis. As spectators, all we can do is wait and see how the current situation unfolds.
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