What if Anything Does the Stock Market Measure?

Many people, observing the stock market's performance recently, find it perplexing. Although the economy shows signs of being in decline, the market is acting bullish. How can that be?

Decades ago, some people claimed, with some plausibility, that the stock market measures investors' expectations.  To many, I am sure, those expectations were mere wishful thinking. But when people had to decide piecemeal whether to purchase market equities, the claim may have had a tincture of truth. Those conditions, however, no longer exist.

Since the introduction of certain types of investment plans (often erroneously called savings or retirement accounts), fixed amounts of money enter the market at regular intervals, if not daily, without any conscious decision by individual investors.  This new money comes into the market whether the market has risen or fallen on the previous day. So if the market falls on one day because of bad economic news, the next day brings an influx of new buy money. In past decades, the entrance of new buy money into the market after a decline was uncertain at best; today it is a certainty. So the effect of these automatic investment instruments is to send more money in pursuit of  a fixed or even a sometimes declining number of assets, which is a classic example of demand exceeding supply. The result, of course, is overvalued stocks, a stock market bubble.

Although automatic investment instruments have been sold to the Congress and the public as a way of increasing savings and supplementing retirement funds, in truth, their real intent is to prop up the value of equities, as is demonstrated by the failure of these plans to actually increase the American savings rate. These plans are not and never have been created for savings or retirement. Their sole objective is and has been to allow the rich to get richer by scalping the poor. Until the introduction of these automatic investment instruments, the rich had to scalp each other.

So what do stock market values really measure? The answer, I'm afraid, is greed. (4/28/2007)

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