WEEKLY WHINE

Who's this Oscar fellow, anyway?

So the stock market has had a rough time recently. Nobody seems to know why this should happen at this time in particular. Chances are that somebody stole into Al Greenspan's office one evening and turned the big dial from "Boom" toward "Recession".

On TUE 20 MAR 2001, the Federal Reserve Board cut interest rates by half a percentage point, less than what some folks hoped would come. They were sorely disappointed, and the markets answered similarly. Even so, the Nasdaq composite index managed to finish last week in positive territory. The Dow Jones Industrial Average, on the other hand, was not so lucky, falling more than three hundred points over the week.

The eyes of the world are now on the American stock markets to see how they hold up in light of this latest development. Unsurprisingly, the signals so far are mixed. If the market reacted decisively one way or the other, that would be cause for concern. But one of the two major indexes has actually risen this week, and it's the other one. Where does that leave us?

Time says that Al Greenspan is "setting up a high stakes game of chicken between the Fed and Wall Street". He's got tremendous clout down there on Wall Street - a lot of investors are taking him at his word when he says that the markets are strong enough to recover from this temporary setback.

Fundamentally, that's just about all the markets need. Contrary to what some might tell you, the markets don't have a mind of their own; they're merely a reflection of the traders' minds. When people buy, the market goes up. When they sell, the market goes down. When investors are confident in the market, they buy up things. That sends the indexes up higher. Similarly, the Nasdaq Bubble Burst, as it's frequently called, of last year started with a few of the dotcoms finally admitting that they're not very good businesses and going under. That made investors wary of the other dotcoms, a condition that spread to the rest of the Nasdaq and from there to the DJIA and the New York Stock Exchange.

So what's the problem now? Most of the dotcoms that were going to die already have. The US dollar is still strong, and consumers are still willing to spend it. When the economic indicators are positive but the markets aren't, what do you do? A common maxim in spaceflight is "If you don't know what to do, don't do anything", and it could well apply on Wall Street as well. But why? Have the markets made themselves into self righting machines, and if so, how?

From the looks of it, traders aren't going to be convinced of a turnaround unless there are tangible signs, like companies actually meeting their earnings expectations. The expectations, in turn, are decided by traders. So if they want success, they'll set their expectations lower, and the imagined success of the companies who meet their expectations will drive the markets back up.