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Table of Contents

Definition of Various Market Indexes
Market Indexes - An Historical Perspective
Corrections, Market Psychology, and Fear
Market Drivers - Earnings, Liquidity, Inflation, Irrational Exuberance, and Fear
Some Stocks/Sectors/Markets Go Up while Others Go Down
Broad Based vs. Narrow Based Phenomena
Economic and Business Cycles
The Global Economy
Related Web Sites
 
 

Definition of Various Market Indexes
 

         Stock exchanges are where stocks are
         bought and sold. Here's some information
         about the three major ones in the United
         States:

         New York Stock Exchange

         The New York Stock Exchange (NYSE), also
         known as "The Big Board," is the world's
         largest stock market, with a total market
         capitalization of more than $10 trillion. Stocks
         are bought and sold on a trading floor
         located on Wall Street in New York City.
         Trading on the exchange begins each
         weekday at 9:30 a.m. and ends at 4:00 p.m.
         ET. Listing more that 3,000 stocks, the
         NYSE provides the most liquid, visible forum
         for the trading of securities worldwide. It also
         offers the fairest and most open pricing
         through its competitive agency-auction
         market. The NYSE plays a leading role in the
         capital-formation process, raising money
         through initial public offerings (IPOs) for a
         growing number of domestic and non-U.S.
         companies. It generally lists the oldest,
         largest and best-known companies in the
         U.S., as well as companies of all sizes and
         from all business sectors throughout the
         world.

         American Stock Exchange

         At the American Stock Exchange (Amex),
         more than $1 billion in stocks, bonds, options
         and derivative securities are bought and sold
         each day by investors worldwide. These
         securities are traded in the open competition
         of an auction market on the Amex trading
         floor located in lower Manhattan. Powered
         by state-of-the-art technology that includes a
         greatly expanded Internet site
         (www.amex.com), this auction market brings
         buyers and sellers directly together, with
         prices determined by bids to buy and offer to
         sell. Specialists in each security act as
         auctioneers at each trading post, matching
         public buyers and sellers. In the absence of
         public orders, specialists are required to risk
         their own money in order to maintain fair,
         orderly and liquid markets for public
         investors. Exchange officials and Amex staff
         monitor all trading activity, while trading
         information is electronically reported on the
         ticker and instantaneously surveyed by the
         Amex Stock Watch team several floors
         above the trading floor. As securities markets
         become more and more global, the demand
         for financial information has grown
         exponentially. In addition to its role as a
         marketplace for trading securities, the Amex
         has expanded the breadth and scope of the
         unique and customized investor marketing
         programs it offers listed companies to help
         them communicate effectively with the
         investment community.

         The Nasdaq Stock Market

         The Nasdaq Stock Market, located in
         Washington, D.C., is made up of the Nasdaq
         National Market (NNM) and the Nasdaq
         SmallCap Market. There is no physical
         exchange where stocks are traded. Instead,
         prices are determined and trades are made
         on computer screens at brokerages around
         the country. The more than 5,500
         Nasdaq-listed companies trade in a highly
         structured environment which has listing
         standards, real-time trade reporting,
         corporate governance requirements,
         affirmative obligations for market makers,
         execution services, and automatic linkages
         with clearance and settlement facilities.
 
 

Market Indexes - An Historical Perspective

Below we see long term charts for the S&P 500, the DOW, the Nasdaq, and the Russell 2000 indexes. Note the general uptrend in all of these indices. Notice the flat, or sideways movement of the DOW from the mid 1960s until about 1982. This general uptrend indicates that American companies have historically been in a long term earnings growth phase. If these trends continue, then the long term investor has a good chance of continued profits in their portfolios.

Corrections, Market Psychology, and Fear

ABSOLUTELY take the time to read this WORTH Magazine article by Peter Lynch and John Rothchild called The Fear of Crashing.
 

Market Drivers - Earnings, Liquidity, Inflation, Irrational Exuberance, and Fear

(INCOMPLETE)

What makes markets go up ? In general, its the following things:
 

• Growth in Corporate Earnings (and Gross Domestic Product (GDP))
• High Liquidity (lots of money pouring into a market)
• Low Inflation (along with low interest rates)
• Irrational Exuberance (basically due to excessive liquidity)

What makes markets go down ? In general, its the following things:

• Reduction of Corporate Earnings Growth (and GDP)
• Rising Inflation (along with higher interest rates)
• Fear

Some Stocks/Sectors/Markets Go Up while Others Go Down

In the mid to late 1990s, the semiconductor industry fell out of favor with Wall Street. This was due to the massive devaluation of DRAM memory chip prices for computers. This phenomena caused the stock of many semiconductor manufacturers to plummit (with the exception of Intel, who the street thought could do no wrong). Even semiconductor manufacturers like LSI, whose primary business was not DRAMs, got hammerred to the ground. Now grant it, semiconductor manufacturers did feel the impact of the Asian crisis, but Wall Street seemed to punish the whole sector across the board. For the savvy, this led to tremendous buying opportunities as the Asian crisis subsided, and Wall Street analysts learned the difference between memory chips, hybrid chips, RF chips, GaAs chips, and analog chips.

Also at this time, the Japaneese Nikkei lost tremendously as Japan slid deep into recession, while the US DOW, NASDAQ, and S&P 500 markets soared to new heights. In the decade or so before, the Nikkei soared to new heights, while US businesses rushed to learn the Japaneese Business Style that was thought to be superior to the US style. You don't see that happenning much anymore.

Also at this time, US bank stocks were beaten down over fears of a Global Financial Meltdown, while money poured into US treasuries and US utilities. The Hong Kong market (The Hang Seng) dropped in sympathy with the Nikkei, as well as many other Asian markets, only to recover soon thereafter to levels on a percentage basis that rivaled, and in some cases, exceeded, the gains in the US markets.

The bottom line is that various stocks/sectors/markets go up while others go down. Understanding this phenomena very well (especially at the global level) can bring GREAT profits to the individual investor.

A proper global diversification strategy of investments across a number of stocks/sectors/markets is imperative for today's long term investor. At present, hindsight says that it has been best to be heavily weighted in US markets. But for those who search diligently, many investment gems will be found throughout the world, where in many cases, better valuations can be found.

Additional info can be found at:

• Stock Market Volatility by G. William Schwert at the University of Rochester
• Portfolio Manager Commentary by Robert Loest, Ph.D.
• Why Does Stock Volatility Change Over Time?
• World Stock Exchange Fact Book
• Money.com Special Report: Stock Market Vertigo
• Understanding Market Volatility

Economic and Business Cycles

The two central issues of macroeconomics are evident in the figure below which shows a time series graph of real GDP (Gross Domestic Product) in the US over the last forty years. GDP is a measure of total production of goods and services in an economy. The two obvious features of postwar GDP are its upward trend (GDP has generally been increasing over the postwar period) and the short-term fluctuations or "wiggles'' in this generally upward-sloping line. We refer to these two issues as economic growth and business cycles, respectively. When you look at data over periods this long, the wiggles don't look very important, and in a sense they aren't: the short-term fluctuations are a small part of the wealth of nations. But from a personal point of view these cycles can be very important, as businessmen and workers dealing with the 1992 recession and continuing malaise could tell you.

So we see from above there there are basic cycles that American business go through. It is important to understand where we are in the cycle and how it relates to current stock prices and values. Purchasing stocks at or near the bottom of a business cycle, if valuations are good, should yield good profits for the patient investor when the cycle swings back upward. Patience is the answer !

In the 3rd quarter of 1998 in the US, corporate earnings are down from the same period a year ago. Yet, if the declining interest rate environment ensues, then the business cycle has a good chance of turning upward soon.

The Global Economy

The Asia Crisis Home page provides MANY articles involving the Global Economic Crisis in Asia and other parts of the world.
 

Related Web Sites

Read Louis Rukeyser's Newsletter Commentaries (updated monthly) for Lou's own insightful comments on the state of the markets, and check out his Wall Street Club.