Depressed investorWith second-quarter earnings season winding down, companies in the S&P 500 have so far reported an increase in earnings per share of about 29%. And companies have plenty of cash -- $1.84 trillion to be specific, according the Federal Reserve. But yesterday the stock market lost almost 3%. Why so glum, market?

The first thing to point out is that there is no way to fully explain why stocks go up or down every day. Yet the media feel compelled to come up story lines that serve as an explanation. The latest one is the "Fed is out of bullets" -- the idea that investors have lost confidence in the U.S. central bank because there's nothing more it can do to fix the economy. If that were a valid explanation, then how would it explain why stocks rose Tuesday as a foreshadowing of the Fed's latest pronouncement was being broadcast?

Some also savor the opportunity to jump on every piece of news -- related or not -- as a way to confirm their political beliefs. On Wednesday, a colleague sent me an email about the state of the U.S. economy, along with a link about the jobless statistics citing them as evidence to support why the stock market fell. Along with the link, came his note: "I believe that recovery summer has gone bye bye. Looks like today's stock market thinks this way. Look at the comments for some flavor about what people are thinking,"

The News Doesn't Move High-Frequency Traders

So what exactly moves the market each day? As I've written in DailyFinance, 70% of daily trading volume is conducted by so-called high-frequency traders. These HFTs buy trading data so they know a fraction of a second before an order is executed that, say, a huge sell order for a particular stock is coming up. HFTs use such information to bet on that stock's decline right before the trade is executed.

In holding their positions for an average of 11 seconds to make a few pennies of profit, HFTs have little time to contemplate a company's earnings or what might be going on in the economy.

Over the long run, stock prices should reflect future earnings. Currently carrying a price-earnings ratio of 12, stocks are historically cheap -- trading far below the long-term average P/E of 15.5. By another measure, the so-called price/earnings to growth (PEG) ratio, stocks are a screaming buy. Eight thousand analysts surveyed by Bloomberg think the S&P 500 companies will post a 35% rise in 2010 earnings. Based on that, stocks are trading at a PEG of 0.34. I think a PEG of 1 is reasonably valued.

A recent NBC/Wall Street Journal poll suggests that Americans are feeling quite surly toward Washington and gloomy about the economy. In my view, the hot summer weather is just as good an explanation of why stocks fell as the results of this poll.

Just because two events happen on the same day, it doesn't mean that one caused the other. So cheer up, market! Earnings are growing, cash is high, P/Es are low and nobody wants to go anywhere near stocks. Hold your nose and buy.

Increase your money and finance knowledge from home

Investing Like Warren Buffett

Learn from one of the world's best investors.

View Course »

Investing in Emerging Markets

Learn to invest in a globalized world.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Mr Cohan maybe you need to be among the 22% plus real unemployed. to see why americans are feeling down and not investing so the rich can get richer. But hold on we are headed to full time socialism or worse so the govenment will only need one news agency. ooops they may not be you

August 14 2010 at 9:53 PM Report abuse +1 rate up rate down Reply

Danie the dems hold a huge majority and pass spending every day right over the republicansSo stop the bull and go back to your ACORN office and live off our tax dollars

August 14 2010 at 9:43 PM Report abuse +1 rate up rate down Reply

If profits are up WHERES THE JOBS????????????????? Oh yes we bailed you out now your bailing out on us just like the government.

August 14 2010 at 9:40 PM Report abuse rate up rate down Reply

Marie Antoinette earned the nickname of "Madame Déficit" in the summer of 1787 as a result of the public perception that she had single-handedly ruined the finances of the nation. In France bread prices started to rise due to the severe 1788–1789 winter. There is no evidence for the "let them eat cake" but she was vilified by the French Press in an increasingly hungry and impoverished country where the rulers overspent and became entangled in expensive foreign wars i.e The American Revolution. Food stamps are the Great Depression II form of breadlines. 40 million Americans are receiving food stamps. The dukes and dutchesses of Wall Street, the American nobility, are doing well. And 13% of the commoners are in breadlines. Is Cohan a French name?

August 13 2010 at 10:25 AM Report abuse rate up rate down Reply

so, congress earns six figures with full benefits while they wreck the economy and send us the bill...and while they legislate everything for us while exempting themselves....why???? is this okay with everyone? and why can't we demand that The Fed be audited and ended? they are not keeping our dollar strong so who needs them?

August 13 2010 at 8:22 AM Report abuse +1 rate up rate down Reply

could be the trillion dollar deficit.
could be the printing and dilution of our dollar.
could be the manipulating of interest rates, gold prices and stock prices by our government.

August 13 2010 at 8:21 AM Report abuse +1 rate up rate down Reply

Peter, WOW ! are you so hardheaded? Cant you see that we have high unemployment, government deficits, bankrupticies, etc? Money are not flowing into the market. lastly, you have to own up to the fact that oil prices are still too high!

August 12 2010 at 11:47 PM Report abuse rate up rate down Reply

beacuse obama is an ass .......wake up people ....

August 12 2010 at 3:00 PM Report abuse +2 rate up rate down Reply

Our Nation's first trade deficit was in 1968 with Japan. This trade deficit was not caused by NAFTA, or any other multi-national trade agreement. It was caused by the "Anti-Establishment" movement, inprotest for the Viet Nam War. They said that Government and Big Business were in bed together to keep the war going for profit. We have had trade deficits ever since. At the same time, President Johnson and the Democrats in Congress passed the expansion of social welfare programs. We have been in deficit spending mode by our government ever since. The Clinton balanced budget was a fluke. Our government is on the road to bankrupcy and has been for a long time. Most Americans were not paying attention, until now. If American workers want to bring jobs home, then they have to support businesses here. You have to get past the "CEOs are all Greedy" mindset. There are greedy people everywhere, and they have been around forever. But, not supporting businesses here only hurts job creation here, and the greedy people always go where the money is to be made. You will never get rid of them, but you can make them come home without the help of government.

August 12 2010 at 2:40 PM Report abuse +2 rate up rate down Reply

So 70% of the volume is from front-runners? And the government (Fed) can announce any time that they are going to do something that will affect the markets for months?

Look at mutual fund cash flows and levels, then look at bond funds. People have figured out the market is rigged and the government is rigged and its not in their favor. This is Great Depression II and people are leaving stocks and won't be back, ever. If they have any thing left.

The cards are marked and the dice are loaded but people should hold their nose and get in the game?

I think you should get a candy-striped shirt and a bamboo stick and become a carnival barker. "Step right up folks! A winner every time!"

August 12 2010 at 2:12 PM Report abuse +2 rate up rate down Reply