What makes a market?

Wooster Corthell |

To our clients and associates,

A young client of mine asked me this week to explain why the markets go up and down. She noticed that last week the market was down about 2½ percent and this week, it’s up about 3%.

I explained that at its most basic level, when the market goes up it’s because there are more buyers than sellers. When it goes down, the opposite is true. In other words, if the demand for a stock is high, the price will rise.

An analogy is what happens when you put a “For Sale” sign on your car. If five people are interested in buying it, you’ll probably receive a higher offer than if only two are bidding on it.

On Monday for example, Moderna Therapeutics announced that 45 of 45 participants developed antibodies for COVID-19 when given their experimental drug. Investors saw this as having world-wide potential for re-opening whole countries and sparking their economies. Higher optimism fueled demand for stocks and the market rose over 900 points.

A demonstration I provided to an adult class may be appropriate here. We were in a building with an escalator. I stood at the bottom with a bright orange yo-yo. I asked the group to keep their eye on the yo-yo as I moved it up and down. Stepping onto the escalator, I held the yo-yo over the side asking the group to continue to watch the ups and downs carefully. At the top, I explained that the motion of the yo-yo represented the daily movements of the market – driven mostly by the psychology of thinking du jour. Some days it was good, other days not so good.

On the other hand, the long term gains of the market were represented by the slow, steady climb of the escalator, which are based on the fundamentals of the economy and the earnings of the underlying companies. This is what investors need to keep their focus on.

By tuning out the daily noise of talking heads espousing their opinions, and instead concentrating on the long term potential of the American economy, an investor will do the right thing and stay invested through those times when the escalator breaks down and it seems like it will never start up again.

On the lighter side:  A young man, looking at the problems created by the coronavirus, confessed to his wife: “I just feel that I don’t want to have children.” She responded: “Actually, I’m relieved to hear you say that. I’m thinking I don’t want children either. He said. “It’s settled then. Let’s go tell the kids.”

Wishing you all the best!

Al Wooster

Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.