{"id":26514,"date":"2022-05-13T11:01:16","date_gmt":"2022-05-13T15:01:16","guid":{"rendered":"https:\/\/www.moneysense.ca\/?p=257824"},"modified":"2022-05-13T11:01:16","modified_gmt":"2022-05-13T15:01:16","slug":"making-sense-of-the-markets-this-week-may-15","status":"publish","type":"post","link":"https:\/\/www.moneysense.ca\/save\/investing\/making-sense-of-the-markets-this-week-may-15\/","title":{"rendered":"Making sense of the markets this week: May 15"},"content":{"rendered":"
<\/div>\n

Making sense of the nonsensical<\/h2>\n

I\u2019m one month into writing \u201cMaking sense of the markets\u201d when this<\/em> happens: everything and anything. <\/p>\n

Is there like a dollar sign-shaped bat signal we can use to summon Dale Roberts back? (Roberts<\/a> is the original writer of this column.)<\/p>\n

Making sense of the short-term movements in asset markets is never exactly easy. But for the last two years, forecasting most of the world\u2019s stock markets has meant deciding which beautiful sky was the sunniest. We had it pretty good. Recent headlines, though, have proven that the outlook just got a lot cloudier.<\/p>\n

The first thing to keep in mind when looking at the stock market\u2019s serpentine moves over the last week is that prices really are pretty rational in the long term. Over the short-term, however\u2014not so much. How do we justify a stock price dropping 10% or more of the price evaluation before its earnings announcement, despite meeting earnings expectations for the last three months? The lesson being, of course, that while markets are generally efficient, it can take them a while to realize that efficient pricing mechanism\u2019s full potential.<\/p>\n

If stock prices aren\u2019t responding to the fundamentals, such as earnings, then why are they going down so fast? Well, it\u2019s probably a combination of many things. And they\u2019re probably not particularly relevant in the long run. Here are some of the plausible theories I believe are impacting investor sentiment.<\/p>\n

    \n
  1. Rising interest rates make safer investments more attractive. If you can find a five-year guaranteed investment certificate (GIC) for 4.15%<\/a>, suddenly those dividend stocks don\u2019t look quite so unbeatable right?<\/li>\n
  2. Rising interest rates make equity in indebted companies much less attractive. When central banks were begging for business to borrow money and throw it at the economy, no one was bothered much by huge loans used to fuel growth. It turns out that when a bigger and bigger percentage of a company\u2019s revenues go towards paying interest, shareholders don\u2019t get as much put in their collective pocket.<\/li>\n
  3. New-age algorithmic trading<\/a> combined with traditional investor panic can quickly build downward momentum that isn\u2019t really justified by anything other than it\u2019s physiologically really difficult to see the value of your portfolio go down.<\/li>\n
  4. Investors have become more and more comfortable with borrowing money<\/a> in order to invest in stocks, or to speculate on stock movements using options. This is referred to as \u201cleverage.\u201d And when asset prices are going up, it allows you to make money using other people\u2019s money\u2014which is a pretty good deal. The problem: Just as leverage can accelerate the good times, it can also hit the gas on the bad times. As lenders see asset valuations drop, they worry about defaulted loans, and they force leveraged investors to sell via a demand called a \u201cmargin call.\u201d If the bank gets worried that you won\u2019t be able to pay your loan, they will force you to sell the assets you currently have. Of course, the more people are forced to sell, the lower the prices go. And the cycle can quickly become supercharged.<\/li>\n<\/ol>\n

    Even with the above four points, there comes a point when an honest market commentator has to simply throw up their hands to say, <\/strong>\u201cI don\u2019t know. It\u2019s just weird right now, and I don\u2019t really get it.\u201d <\/p>\n

    I admit that it\u2019s not the sort of bold pronouncement that TV financial gurus love to make.<\/p>\n

    But what else is there to do after the following sequence of events:<\/p>\n

    Source<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    Making sense of the nonsensical I\u2019m one month into writing \u201cMaking sense of the markets\u201d when this happens: everything and anything.  Is there like a dollar sign-shaped bat signal we can use to summon...<\/p>\n","protected":false},"author":1,"featured_media":26516,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rop_custom_images_group":[],"rop_custom_messages_group":[],"rop_publish_now":"initial","rop_publish_now_accounts":[],"rop_publish_now_history":[],"rop_publish_now_status":"pending","footnotes":""},"categories":[7,10],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/posts\/26514"}],"collection":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/comments?post=26514"}],"version-history":[{"count":0,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/posts\/26514\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/media?parent=26514"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/categories?post=26514"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/tags?post=26514"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}