Markets Will Recover, But When?
Markets are mechanisms which show the effect of discounting. At all times they will reflect all the available information about the future of the company. Prices will vary according to its expectations. As the expectations of people change, the price will reflect that change. If the expectations increase, the price will increase as well. On the other hand if the expectations reduce, the price will reduce accordingly. In reality however, things do not go so smoothly. In the times of growth and spending when it’s easy to get credit the market will focus on to the future. However, when the markets show a bearish trend, due to so much uncertainty all that matters is the present performance of the company. In situations like these analysts are unable to predict what will happen even over 3 months.
Currently there are mixed sentiments in the US stock markets. It is divided between the present situation which is that the economy shrinking and the common knowledge that help is on its way. The market knows that the immediate bill will help in fostering new jobs but doesn’t know about the timing and specifics of job creation. One is unable to see any “Hiring Now” sign yet.
As we are in a debt deflation economy, when the cash flows are not in line with the price of the asset, the prices will fall. Similar is the case of a house which is given on rent. The rent will increase if there is an increase in the market value of the house and the rent will reduce if there is a reduction in the value of the house. The cash flows will thus always reflect the value of the asset. If the debt service, which is the interest, charge, on an asset is larger than the asset can generate, the debt needs to be written down. Once the debt is written down, the stimulus program introduced by the Obama Administration will take hold.
The S&P 500 is now at the same level as it was 11 years ago. There is no doubt that eventually all these efforts in order to revive the economy will have impact and sooner or later prices will stop falling, expectations will rise once again, bullish trend will return and will bring greed along with it. Businesses run on simple models and companies with strong balance sheets and low leverages will remain unaffected by the crises and will prosper. An example of such a company is McDonald’s (57, MCD) which has been a defensive player in the market with a strong management and has virtually no debt and pays a dividend of 2.8%.
We can now only hope that the efforts made bring their fruits soon.
