The movement of securities prices is based ultimately on the sentiment of investors. This sentiment stems from investors conducting research and gaining an understanding of where companies stand in the economy and what the expectations are for the future. If there are shocks to an economy, such as a financial crisis, this places doubt in the minds of investors, which causes hesitancy and, ultimately, a lack of confidence. This lack of confidence can become transferable to many investors, which can lead to a vicious cycle, causing more uncertainty. Investor confidence can be fragile and potential investors should attempt to understand the current environment before allocating funds.
It’s clear that the global economy has been in a weak state for an extended period of time. However, investor confidence has rebounded over the past few months in anticipation that the global economy can regain past momentum.
Numerous problems remain across various sectors in the global economy, and they are preventing an increase in growth. Yet one risk that could severely impact investor confidence is the possibility of war in Asia.
Many people quickly dismiss the idea that yet another war could ignite. Investor confidence clearly doesn’t see this as a probability, considering how high the stock market is. However, as a prudent investor, one must evaluate every potentiality.
There are two areas of concern: North and South Korea, and China and Japan.
The situation between North and South Korea is quickly deteriorating. This past Monday, both nations staged war games, while increasing threats. South Korea has troops on high alert, while North Korea claims it has nullified the armistice.
North Korea is increasing its aggressive stance in the hopes that the world will back down and cave in to its demands. The nation has repeatedly warned that it will use nuclear weapons.
Tensions are also increasing between Japan and China, the catalyst being three tiny islands in the East China Sea.
Both nations claim territorial rights to the islands, with each nation increasing its aggressive stance. On January 10, two Japanese F-15s intercepted a Chinese plane flying in the vicinity of the islands, an action to which China retaliated by sending its own fighter jets.
Japan is now considering firing warning shots if any further Chinese aircraft encroach … Read More
What does it take to create and sustain long-term gross domestic product (GDP) growth in an economy?
One of the most important factors is a high level of investor confidence.
Investor confidence throughout the economy can help support the formation and expansion of businesses and the development of new technologies and ideas.
GDP growth, as we all know, does not originate from government-led initiatives, but from businesses creating new innovations and technologies.
One of the problems with government intervention is that GDP growth is actually stifled and reduced due to a misallocation of resources. This misallocation of resources occurs when weak firms are supported or bailed out due to poor management decisions.
The funds allocated to support weak or underperforming companies are then unable to flow into stronger corporations that can expand, innovate, and make the economy fundamentally stronger, lowering GDP growth potential and ultimately weakening investor confidence.
Over the last few years following the financial crisis, many have thought about ways to prevent such an outcome. One of the more original writers of our time is Nassim Nicholas Taleb.
Author of the famous books Black Swan and Antifragile (both of which I highly recommend), Taleb recently suggested several ideas, with which I completely agree, to reduce the possibility of another financial crisis, while helping restore investor confidence.
One of the most interesting ideas I’ve heard to restore investor confidence is to remove the incentive for firms to become too big to fail. Instead of forcing companies to be broken up, Taleb suggests that any firm deemed “too big to fail” should pay its staff no more than a corresponding … Read More
There are various measures to determine investor sentiment regarding the general market. The most obvious is to take a look at a broad index, such as the S&P 500, and see where it’s currently trading. Because price is truth, the market does not lie. If people are bullish or bearish, their actions in buying and selling shares within the S&P 500 will be translated into corresponding price moves.
However, it is interesting to look at corollary indications to determine how strong the underlying trend really is. Investor sentiment is extremely difficult to predict, as is anything in life. While the future is unknown, by understanding the strength of current investor sentiment, we can help form a picture about what the future holds for the S&P 500.
State Street has an Investor Confidence Index, developed by Kenneth Froot, a Harvard University professor, and Paul O’Connell of State Street Associates. According to State Street, “The State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.” (Source: State Street, last accessed January 14, 2013.)
Let’s take a look at this metric of investor sentiment in relation to the S&P 500.
For the month of December, the Investor Confidence Index moved upward, just slightly higher than November, which was the low of 2012. Professor Froot commented, “As has been true for some months now, global institutional investor confidence remains weak as institutions continue to shy away from equities.” (Source: “Investor Confidence Index rises slightly in December by 0.4 to reach 80.9,” State Street, December 26, 2012, last accessed January 14, 2013.)… Read More
With investor confidence still relatively weak, many are looking for any signs of a rebound in the global economy. One area many are looking to is the Chinese economy. Not only has the Chinese economy become a greater force within the world economically, but many U.S.-based companies are generating a significant amount of earnings from that nation. Investor confidence is partially being predicated on the hope that the Chinese economy can offer some glimmer of optimism, as opposed to the still anemic gross domestic product (GDP) growth levels in America.
Recent data from China offers a bit of a mixed picture. Exports in October rose at the fastest pace in five months, coming in 11.6% higher than the previous year. This compares to 9.9% year-over-year growth for September. That is certainly a good sign for the Chinese economy, and some investor confidence might be rallied off such figures. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.) However, the sky is not all clear yet.
The head of the National Development and Reform Commission, Zhang Ping, stated that he believes the Chinese economy must be prepared for increased turmoil from various nations around the world. In addition, domestic issues still are quite serious. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.)
This is a difficult way to build up investor confidence. On the one hand, there are some signs the Chinese economy and the global economy might be moving upward off the floor. However, there are still numerous indicators pointing to the fact that things could quickly unravel and … Read More
Investors bid up stocks prior to the presidential election on Tuesday, when President Barack Obama won his second term. Investor confidence was due to some uncertainty eliminated with the election, but the nervousness quickly resurfaced on Wednesday morning, impacting investor confidence; stocks plummeted on the realization that Obama still has many hurdles to overcome and the fact that the global economy, namely in Europe and China, may be prone to more weakness that will negatively impact investor confidence.
I’m sure President Obama is relieved that the election is over; but I can tell you, it’s only the beginning of some difficult times ahead that will challenge his patience and fortitude, while also impacting investor confidence.
While the uncertainty of the election is over, there is a lot of work ahead for Obama, as he now needs to immediately deal with the pending fiscal cliff. This will not be an easy feat, but it must be done to instill some investor confidence in the equities market.
The major problem is that President Obama must be careful, as he will need to cut and control the deficit and national debt of over $16.0 trillion, while at the same time not allowing the full extent of the $607.0 billion in broad budget cuts to take place on January 1; if he doesn’t balance the two, he will likely kill the economic recovery, 2013 and 2014 gross domestic product (GDP) growth, and investor confidence.
Moreover, any agreements or decisions made by President Obama will need to be agreed upon by the House. This will be problematic, given the continued political gridlock, as the Republicans … Read More