If you are anything like me when it comes to your finances, you probably have more than five finance-related apps, which is at least five more than your average Joe has.
There is something about finance that just makes me feel right. I mean, it could be that having a portfolio that has given me some pretty nice (read: over 10 percent annually) returns has something to do with it, but, who’s keeping count?
Recently, the stock market has been moving like crazy. At the beginning of the week, the Dow Jones Industrial Average, or as we call it, the Dow, was at a little over 16,500.
Fast forward to Wednesday and it went below 16,000. That’s a loss of more than 500 points in less than three days! That Wednesday, it went down as much as 460 points.
If you are one of the day-traders who tries to time the market, I’m sure you’ve had one hell of a week. If you are like me and a few others, then this week is practically insignificant because we buy and hold.
This means that we purchase stocks, bonds, ETFs and other assets, and hold them until maturity or for an extended amount of time.
Since the market tends to grow year after year, all the crashes and recessions end up being insignificant. This is, in my opinion, the best way to invest (but I’m not a licensed advisor, so take what I just said with a grain of salt).
You may be wondering, what has been going on in the past few days that made the market behave like a kid with a sugar rush? Well, a few things, actually.
I think that most movements are related to the weak US data, the really bad economic situation that Europe as a whole is facing and the Ebola crisis.
It bounced back yesterday, primarily because of some statements uttered by one of the Fed’s officials that their Quantitative Easing (QE) program could continue.
This made investors happy because the so-called “tapering” could come to a halt. Today, the Dow is going up thanks to some good earnings-related news from companies such as General Electric and Morgan Stanley.
You could say that the situation in the US is pretty robust, and that there shouldn’t be any reason to consider short-term fluctuations as guidance of what could happen.
Hell, you could even point me to the unemployment rate which has been going down. Yes, it is true; it has been going down, but not for the reasons you would expect.
If you look at the labor force participation rate, you’ll see that it is pretty low. As of September, the labor force participation rate is at a 36-year low, sitting at 62.7 percent.
Not only that, but, The Economist recently released an article stating, "Since 2000, employment of those ages 65 and over has risen by 51 percent, while that of those aged 25-64 has fallen 3.5 percent." Aside from these, there are other issues with the economy, as well.
The problem with the current stock market is that it is, more than likely, a bubble. It has been getting larger and larger thanks to the expansionary monetary policy of the Federal Reserve Bank. With its QE programs, and by keeping interest rates artificially low, money is constantly going into the system.
The reason we haven’t seen the much-feared hyperinflation is because banks have been increasing their excess reserves, which are about to hit 3 trillion.
This has kept inflation at bay, and made it appear as if the economic situation is stable. Eventually, all of this could come to an apocalyptic conclusion if the course is not stabilized. If you want to see how this all could end, check out the Austrian Business Cycle Theory. Just a heads up, it ain’t too pretty.
One thing I tell people is that when talking about the stock market, you shouldn’t really focus on the Dow. The Dow is not the whole stock market. In fact, it is an index of only 30 stocks.
If you want a better indicator, use the S&P 500, which is composed of 500 large companies spanning the vast majority of industries. The S&P has been moving a lot this week, as well, so you should definitely check it out.
This last stretch of the year is going to be pretty interesting in terms of finance-related news. Even if you aren’t a finance geek, you should keep an eye on what’s going on out there. It is something that, whether you like it or not, affects you in more than one way.
So do yourself a favor and stop whatever it is you are doing. Do a bit of research on stocks, the market, etc. and learn a little something. Who knows, maybe you’ll end up being like the dart-throwing monkey that picks stocks as well as the so-called experts.
Photo Courtesy: 20th Century Fox/Wall Street: Money Never Sleeps