Term Paper on "Stock Market Since 1948"

Term Paper 7 pages (3002 words) Sources: 1+

[EXCERPT] . . . .

Stock Market Since 1948

Stock market is the market for shares and the prices of shares depend on the business situation in United States and one of the most important matters is the state of business. Now one of the major wars of the world is going on in Iraq and America is directly involved in it. This will certainly affect the economy in United States, as there has been a lot of expenditure for this war. It is unlikely that America's allies in the previous wars in the area will help this time, apart from United Kingdom. No help can be expected from Saudi Arabia or Kuwait. The results of the wars can be seen from Graph I -given in Appendix. (The Business Cycle)

The effects of some of the previous situations can be seen from the graph-given in Appendix. In World War II the impact led to a booming economy and this led to a collapse at the end of the war. Prior to the war, there was the recession due to the great depression which led to the drop in prices of stocks very rapidly and continuously. This ended only with World War II. There were also subsequent wars in Korea and Vietnam and they also created similar fluctuations, but the impact was not like World War II. The explanation of the impacts of different phases of the economy are theories which say that when a period of recession comes, then at the end there is a very low point which is reached before the recession ends. Then again the economy starts expanding till the peak is reached. These are just observations and there is no particular reason or explanation given for these events. (The Business Cycle) The quantum of growth and decline are also unknown, and it is possible that this depends on the confidence levels of the people in the economy. This is the reason why the growths due to Korean War and Vietnam War were much less than the effects of World War II. In general, the stock market growths and declines also follow the business cycles, unless there is some direct manipulation of the stock market as we have seen in the case of Enron and others.

The buyer is the investor

An investment in the stock market seems to be very attractive and most people would like to make some extra money by investing in the stock market. The funny part is that in stock markets, a shrewd investor can make money even when the market is falling. Then the investment has to be in stocks that will drop in prices and they have to be sold before they are bought. There are also other sectors that do very well when the market tends to go down. These stocks are difficult to trace and there is no guarantee that will always act according to your expectations. They may continue to go up as long as the market is going down, but may start dropping when the market is going up. This is the importance of stock research and that also does not work all the time, and the best method is to use trusted sources. They are generally able to tell you what stocks should be bought or what stocks should be sold. This is the importance of deciding what you want to buy. The next point is getting a favorable time to buy the stock, and there are very important questions like dollar costs averaging, etc. (How to invest in the U.S. Stock Market)

The problem is that one can still end up buying a stock at $20 and being forced to sell it at $10. The share market continually changes direction, and the market never goes up or down, but is always moving around in cycles. But the cycles are not even and that means that if they rise for 5 days, it is not necessary that they will fall for 5 days. The duration of the movement in the direction and the amount of increase and decrease will tell an investor as to whether the stock is going up or down. An example of this is if the market goes up for 5 days and then falls for several weeks, then the stock is probably on the way down, or that the stock is in a negative environment. It is also very difficult to depend on the stock market analyst as one does not know what he is trying to do or who is paying him. Thus the first and most important thing to do is to judge the mood of the market.

Let us take the situation in 2001-02 and at that time, the situation was bad with a tangled market and companies that falsified the books like Enron and WorldCom. At the same time, the amarket also changes direction when least expected. This happens as the market begins to feel at some stage that the situation has reached the bottom of the pit and situation hence forward can only improve. The reports start coming in that CEOs are beginning to feel that the situation of the company will now start improving. The other important indicator is the company buyback news. When the prices of shares are about to reach a bottom, then companies will start buying their own shares. Again, after an increase also the market will drop as it happened in August 2000. The most important thing to remember is that in general the market moves in the opposite direction that it is expected to. (How to Invest in the U.S. Stock Market)

The position of the market

In the language of the market, a stock may be in an overbought position and that means that the market has brought it to a price that cannot be justified by its price to earnings ratio. On this analysis, a lot of analysts would say that the market is overvalued. Another group of analysts give the greatest importance to the market and they say that a stock is overvalued according to an investor only when the investor sells of the stock. The price to earnings ratio is the general indicator of the value of a stock, and the analysts have used it to measure the position of a stock. At the same time, the positions of a stock keep shifting and look at figure 2. The indexes that existed then were still below the figures that existed more than 2 years ago. (Is the market overbought? Do you think stocks are overvalued?)

At the time two years ago, the markets had peaked and then the slide started, from which the economy took a long time to come out of. This was due to the anticipation of the stock market about a bad situation in the economy and that led to a depressed market. According to the analyst, the market situation was improving and one could expect the situation to improve. At the same time, the decision to buy a particular stock does not depend on the general direction of the market. One has to decide what sector to buy, small stocks or large stocks, stocks or funds, etc. this analysis has to be carried out by the investors. (Is the market overbought? Do you think stocks are overvalued?)

While this investment expert was hedging about the expected results, some others were clearer. The analysis of an expert from Morgan Stanley was "Post-bubble shakeouts don't end quickly; it's like peeling away the layers of an onion. NASDAQ was the first layer to go, followed by IT and then Telecom. But there are still more layers to come off this onion. They include the dollar bubble, the property bubble, and the biggest bubble of them all -- the American consumer. The consumer bubble will undoubtedly be the last to go Saving-short and overly-indebted, the aging America population is coming to that point in the life-cycle when it must begin to come to grips with the looming reality of retirement." (Vital Information for Stock Market Investors! What Every Investor Needs To Know) The coming to grips of the American consumer with reality may come due to spike of oil prices, a surge of white collar layoffs or a deflation of the property bubble. (Vital Information for Stock Market Investors! What Every Investor Needs To Know)

All the three are happening now, and does that mean that stock prices are going to come down? Even earlier the bad position was being seen clearly with a record for debts going bad being established in the quarter from April to June 2002. During the entire period from 1953 to 1999, there were no records of household net worth going down for the full year, but it happened in 2000, 2001 and 2002. Thus it is clear that consumers are spending as much as they can. The market had not met trouble as the consumers had spent more and the increase in housing prices. When… READ MORE

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