Why is the Stock Market Up One Day and Then Down the Next?

Thu, 2011-10-20 19:20

Recently a friend asked, "can you explain this stock market to me"?

Here's my best, plain english, non-technical, explanation of why the stock market is up one day and then down the next.

First, let's review. Near the end of July, we had 3 things that began to worry the market:

  • Congress could not make a timely decision regarding raising our debt ceiling.
  • Standard & Poor's lowered the credit rating of the United States.
  • Now add the last straw, the increasing probability the government of Greece will default on their debt and it was more than the market could handle.  see chart (1.) The Dow Jones Index* declined by approximately 14%**

In our August 5th article we told you to expect a "Bumpy Road Ahead", and looking at this chart (2.) you can see it has been very bumpy.

Everyone wants to know if the market has bottomed (gone as low as it will go). At this point one of three things will happen:  see chart (3.)

  • Reasons why the market stays on this bumpy path - uncertainity and fear of WHAT IF something bad happens with the economy, or Greece or politics or something else. If uncertainty rules, then we will continue to trade approximately between the green and red lines until one by one, the uncertainities are removed, reduced or become reality.
  • Reasons why the market might go up - our corporations are flush with cash, quarterly earnings are good, interest rates and inflation are low. It would be a positive sign if the market begins to trade above the green line AND stays above the green line.
  • Reasons why the market might go down - fear turns into reality and we have bad news from Greece, OR the economy goes into a recession, OR we have more bad political decisions. It would be a negative sign if the market begins to trade below the red line. We could see a substantial drop in value.

That brings us to this question. Has the Stock Market Gone as Low as it's Going to Go? Unfortunately the answer is it's to early to tell. These daily up and down moves of the Dow Jones Index* is part of the normal process after a big drop in the market.

Our belief is the stock market will continue this bumpy ride, maybe all the way to the election in November 2012. Of course we are always on the lookout for new information that changes our outlook for risk and opportunities.

Please let us know if this "bumpy road" is making you nauseated. We can adjust your portfolio allocation and smooth out the ride for you.

WE GUIDE, YOU DECIDE

Stephen Rimmer, CFP®, Certified Financial Planner,™

Doug Brown, Investment Advisor

October 20th, 2011

 

*The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks.

**Approximately a 14% decline from July 21, 2011 to August 10th 2011 in the Dow Jones Index*

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