Stock market investors  are always weighed down with the baggage of acccumulated wisdom that may well be out-of-date. Currently investors are well schooled in the theory of buying on the dips and the [US Federal Reserve head, Ben] Bernanke ‘put’ that forever supports an upwardly moving market.
That’s one reason why sell-offs are so shallow and followed by quick rallies, despite many fundamental indicators that would counsel greater caution. These include numerous profit warnings from the major blue-chips in the Q3 results so far and a grudging admission by economists at the IM F that they seem to have underestimated the downside of the multiplier theory.
Multiplier in reverse
The multiplier theory is the Keynesian view of the world that notes how increased government spending has a greater impact on an economy than the headline figure as the money trickles down through the system.
However, conversely when you cut government spending it has a bigger effect than the cuts themselves. Ergo Greece and Spain are really in big trouble now, and this is having a dragging effect on the entire continent, nay global economy.
You can see, if you care to look, that the bigger macro economic picture has been transformed. The profit warnings from the blue-chips are the warning that this will impact on stock prices too. For fundamentally a share price is only a function of the profits of the company whose shares are being sold.
Yesterday the S&P 500 Index decreased 1.4 per cent to 1,413, the lowest level since September 5th. The Dow slumped 243 points, or 1.8 per cent, to 13,102. Volume for exchange-listed stocks in the US was 6.6 billion shares, or 9.1 per cent above the three-month average.
Some people are taking money off the table but there is still a lot of interest in buying on the dips, that makes for a grind lower rather than a spectacular price fall. It would take a really big Black Swan to shake this complacency. Greece has been the obvious candidate for over two years now but who knows a shock from China might come first.
Disappointing results from 3M, DuPont and Xerox came in yesterday, though after the close of play some better than expected figures from Facebook brought some cheer. That said Apple dropped 4.1 per cent on the launch of the smaller iPad four.
Even the reports that Fed chairman Ben Bernanke may step down in January 2014 could not really pull the rug from under the market. However, if you think about it the master magician himself is telling us that the game is almost up, at least as far as he is concerned.