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Market does what the market does
Crash of 197 < like that of 187 < is more about making money
than about any fundamental weaknesses in U.S. economy
By Philipp Harper
MSNBCThe sell-off in the stock market Monday was an opportunity for
profit-takers and short-sellers to make a little money; it had nothing
to do with the fundamental health of the U.S. economy and will not alter
for long the market1s upward trend.ÿ ÿ ÿ
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So, what happened Monday? Pretty much the same thing that happened in
'87: The market was doing what the market does best < making people
money.
ÿÿÿÿ3UNLESS YOU CAN make a case for a major recession or World War III,
we cannot really justify such a severe decline.ý
ÿÿÿÿThat1s how one stock-market analyst summed up the stunning events of
1987, when the Dow Jones industrial average lost 36 percent of its value
< 984 points < in little more than six weeks. If that free fall was
inexplicable, the Dow1s 554-point drop Monday must seem doubly so.
ÿÿÿÿTen years ago, at least, there was a $200 billion-plus annual
federal budget deficit to send shivers through the market. With the
government raiding the capital markets for the funds it needed to pay
the interest on that debt, there did seem to be a real possibility of
3crowding out,ý of the private sector having to pay such high rates for
money that business expansion inevitably would be dampened.
ÿÿÿÿThat didn1t happen, of course, and thanks to a resurgent economy,
we1ve pretty well grown our way out of the budget deficit. Today the
annual shortfall is closer to $20 billion than $200 billion. Moreover,
American industry has completed a restructuring < often with painful
consequences for workers < that has left it leaner and more competitive.
ÿÿÿÿSo, what happened Monday? Pretty much the same thing that happened
in O87: The market was doing what the market does best < making people
money.
ÿÿÿÿBut, you ask, how can that be when the market1s value declines so
severely? Simple, a lot of people were betting on the decline. It all
has to do with the game within the game, one most of us never play, even
if we are regular investors.
ÿÿÿÿFor most of us, the market is a means to an end, a mechanism that
allows us to put our confidence and money in the U.S. economy and its
constituent businesses. We1re market ants < in it for the long haul <
and more or less immune to the market1s short-term gyrations. If we
invest broadly enough and stay the course, the market1s historic upward
trend will lift us above our losses, ensuring that they remain of the
paper variety.
ÿÿÿÿThen there are the market grasshoppers, the players who don1t invest
in the market so much as gamble on its action. Arbitrageurs who win and
lose fortunes on fractional shifts in stock prices are part of this
group; so are the hedgers who bet on the market1s daily ups and downs,
employing vehicles such as options and tactics such as shorting to make
or lose their money.
ÿÿÿÿHistory teaches that these investors live high and fall hard. Their
patron saint is a fellow named Jesse Livermore, who made a bundle by
being short in the market when it crashed in 1929, but then lost
everything when he misjudged the bottom and went long prematurely. Then,
he went head first out of a window at the Sherry Netherlands hotel.
ÿÿÿÿWhile many of us toss our quarterly mutual fund statements unopened
into the desk drawer < content in the knowledge that if we invest
consistently our money will grow through the miracle of dollar-cost
averaging < the market pros have their fingers constantly on the
market1s pulse, waiting for the slightest flutter. We play the major
trend; they play the minor fluctuation. They also do their best to
cultivate a market psychology they can take advantage of.
The pros played their game, taking some profits and watching some short
positions bear fruit. Now the market can resume its steady appreciation.
ÿÿÿÿHaving for months, if not years, talked up the notion that the
market is over-valued, they look for sharp instruments with which to
puncture the bubble and let a bit of air out. The currency-market woes
afflicting the Far East represented just such a ready-to-hand tool <
though it could just as easily have been read as a positive development
in that it likely forestalls an interest-rate increase by the Federal
Reserve Board.
ÿÿÿÿSo the pros played their game, taking some profits and watching some
short positions bear fruit. Now the market can resume its steady
appreciation < all the way to the next sell-off, when the cycle will
begin again. Only the floor that will be reached next time will be much
higher than the one hit this time around; just as the ensuing recovery
will take the market to heights never before achieved. And so on, until
the U.S. economy develops some fundamental weakness that has yet even to
appear on the horizon.
ÿÿÿÿThe bet here? The Dow gets to 10,000 well before Bill Clinton gets
to the end of his presidency.
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Philipp Harper is Opinions Editor of MSNBC on the Internet.
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