Optimism and Pessimism of Market Participants
Political and Social Factors
Political and social factors can have powerful effects on the stock market. The May ’69 Incident is a good example as is the assassination of Senator Aquino in the Philippines. It is impossible to tell in advance what social or political upheaval can take place that will have a disastrous effect on the stock market. One thing is clear however. The higher the stock market, the more susceptible it is to the forces of market sentiment. If the market is very low, even big political upheavals would have minimum effect on its level. On the other hand, if the Market is very high. even a small wobble an cause it to come crashing down. It is noticeable that because price level in I969 was already low, wen the May ’69 incident did not cause the prices to fall as much as one would expect (only in the region of 30 per cent). I would hazard a guess that if the same thing were to happen in late l987, the stock market could have easily collapsed by 75 per cent. Witness the fact that the Private Adam fiasco led to a l2 per cent drop in prices over one day even before the October 19th Crash took place on Wall Street. Owing to the existence of many factors which can affect the demand for shares over the short term, short term share prices tend to be very unstable. As a result, it is risky to invest in the short term. One’s prediction can easily go haywire. However, over the longer term, such short term factors tend to self-cancel. Interest rate is normally cyclical. Investors too go through cyclical fluctuation in their mood. Over the long term therefore, different forces are at work to determine the level of the stock market. Let us now turn to the long term.