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Newsletter – November / December 2011 – The Change

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The Change

Volatility! Have you noticed how wild the financial markets have become since summer? In August we saw America’s Biggest and Bluest-chip stocks (The S&P 500 Index) drop like a stone. In October it roared straight back up. Gold went up 45% in the seven months ending late August. Conservative, boring US long term treasury bonds went up 26% in two months! The normal staid conservative demeanor of the financial world has yielded to the emotional heaves and sighs of a casino.

This dramatic increase in volatility reflects an underlying increase in the emotions of the participants. And the cover story has focused on the financial plight of the tiny nation of Greece and all those Euro banks who loaned her the money.

Markets are not overly influenced by small investors like CastleMoore and our clients. Big financial institutions move markets. It’s the big guys that are experiencing those palpitations of the heart whenever another edict comes down from Mount Olympus. It’s their buying or selling that causes this volatility. Fear and greed are the markets’ main emotions. What are big institutional money managers so excited about? Why are they reacting with irrational exuberance and irrational fear?

Let’s use a bit of Socratic Logic to solve this riddle. 

Ponder the fate of the typical American Baby Boomer. These are the ones credited with driving the stock market up in the 1990s. Unfortunately for them, the stock market shifted in the year 2000 and their projections of an 8% long term return on stock market investments disappeared. The Oracle was wrong. Buying high quality stocks and holding them for the long term resulted in their not having enough money to retire as they had planned. They have become angry and frustrated.

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