Today the stock market is down substantially, dipping below 11,000 again. Last week it swung up and down like a whipsaw and the rest of this week it'll probably do the same. There's been lots of discussions about who's causing it and why. The concern from many people watching the stock market is the role these swings will have on the economy especially job creation, consumer spending, and real estate. As a former pattern day trader who regularly made hundreds of thousands of dollars in trades in a single day (sometimes a single hour), I can tell you that these swings are all part of a carefully orchestrated game. Just keep in mind that the people running the stock market always seem to come out winning. Which leads me to the first reason the stock markets are swinging:
#1) TRADERS ARE SHEEP. The stock market is dropping some days because markets around the world dropped overnight. If the Nikkei and FTSE drop, it's a sure bet the Dow will drop as well. It's a tug-of-war on who drops and the news is almost irrelevant. Today's cause for concern is European debt. Big swings are caused by scare tactics from the media. The S&P downgrade of the Fed's credit caused a stir but when people actually thought about it, the markets came back strong.
#2) BAD NEW SELLS. There's nothing better for news coverage than the drama of a stock market drop. Notice how many times you'll see the word "plunge" when the market only drops 1%. Of course, if the media stokes the flames of panic you'll see more selling. Right now, media outlets are focused on bad far more than good. Traders always "sell the news" - meaning sell when news comes out, sometimes even if it's good.
#3) EUROPE AND ASIA ARE A MESS. Anyone who has watched the European economy for a few decades knows that the strongest economies carry the weak ones. Germany, France, and England have been carrying the rest for a long time. Now, with Greece and others looking like they'll default on their debt more often than not, every time the European economy (or Asia for that matter) shows any signs of weakness we'll see it as a drop in the Dow. Why? Because foreign countries buy our debt and products. It's a global economy now and we all have to play along. Did you know that China almost had a real estate bubble caused by speculation like the US? They buy our bonds. If their economy collapses we'll feel it - big time. Keep that in mind.
#4) STATISTICS LIE CONSTANTLY. The media will get a report of some statistic, sucha as unemployment, that's preliminary. They'll announce this fake number likes its gospel and the markets will take it at face value to buy or sell stocks. These numbers are always off by a month or so. Now, a few weeks pass by and the real numbers come in. They're always off from the preliminary numbers and are called "revised numbers". These could be good or bad and cause another ripple. Traders don't like to wait so they'll use these numbers, both fake and real, to justify market swings.
What's all this mean to the Average Joe just trying to buy or sell a home? FEAR! Most people don't understand the underlying mechanics of the stock market and if they did, they'd probably get really angry. So, all this movement causes fear. That fear translates into a few things:
- Not selling
- Not buying
- Cancelling a contract
- Trying to renegotiate an existing contract
Try to enlighten your clients that most of this wild movement means nothing in the long term. Don't panic and stay focused on their long-term goal of owning a home. In 10 years none of this will matter and they'll still have an asset worth more than when they bought it.