Who governs Wall Street – bulls or bears? The role of the mass media in the stock market
Stock investing in assumption is an optimistic activity since it bets rising stock prices. Most people (and Americans in particular) have a natural tendency to be optimistic. Stock market bears for ever have been struggling with a perpetually bullish "Wall Street Industrial Complex" – the institutions designed to sell securities to the public. They promote stocks as safe place to invest capital. Since the main activity of bears consist in “short selling” – selling borrowed from a broker stock with the obligation of purchasing it back later with the profit being the difference between the sale price and the repurchase price, presumably lower – bears are natural enemies of those institutions. Trading commissions of short sellers generate little revenue for the brokerage industry that needs a constant inflow of new capital to survive and actually earns huge money from management fees, investment banking, research, and related activities. Their continuously bullish marketing luring investors to buy products and services they offer is propped up by the financial media who receive the money from them for advertisements. At present there are two 24-hour "news" channels, CNBC and Bloomberg, that are engaged in the stock market business. Their influence is powerful and pervasive. Most common investors believe in their point of view - continuously bullish - and buy shares. It is not without reason that during the last 20 years the saying “you snooze, you lose” made a great career, persuading in media investors not to lose an opportunity and buy shares. They are always “cheap”, “promising” or at least “fairly valued” and never too expensive.
In turn, even though there is nothing illegal or unethical about short selling, the people engaged in this pursuit are not the most popular on Wall Street. The word “bear” on the stock market means pessimistic, freaky and ridiculous as such people do not believe in the country’s prospects. During bear markets, when the majority of investors loses large sums of money, bears create resentment and are even accused of “rogue practices”. Moreover, many consider unpatriotic to sell short the country's finest companies and profit from their troubles. Some critics believe that short sales are a major cause of market downturns. For example, two years after the crash 1987, the U.S. government lawmakers considered regulation after allegations of widespread manipulation by short sellers. Although SEC officials reassured the public that manipulations hadn't been uncovered, more rules for short selling was introduced.[1]
There is not only the brokerage industry that presents the bullish point of view. As the influence of stock markets on economic growth is undeniable, the same attitude must be supported by the government. It leads to the situation that every rise on the stock market is seen as a joined success of the government and the citizens of the USA, confirming that the country heads in the right direction, and simultaneously any larger fall is perceived as suspicious, unjustified and posing threat to life of Americans. The symptomatic behavior took place after 9/11 terrorist attack, when media urged people not only not to sell shares, but on the contrary, buy them – considering this as a highly patriotic act:
Media Peaceful Ways of Fighting Back Against Terrorism. Keep your money in the stock market; leave your investments where they are. Show your faith in our economy by investing in the stock market. [2]
The other problem touches personal pension plans. Since the early 1980s there has been an explosion in individual accounts, that would be used for the generation of retirement income. In the USA there are two types plans: fixed income, that invest in bonds, ensuring to stable portfolio, and equities, that offer potentially more money but simultaneously adding volatility. Some criticize the second, arguing that because of the volatility of equity market, the personal pension plans would not be unable to provide a satisfactory pension to all retiring workers.
To sum up, apart from few bears there are no people in the USA, who would be interested in falling share prices. Unfortunately, rising feverishly prices must fall, making a large sum of money to evaporate and posing risk to the country and its citizens. Theoretically, the government and its agendas should leave the stock market alone. Ultimately, there are forces of demand and supply that have been making him functioning properly since ages and every artificial way of influencing them proved to be wrong. But is it for real?
2. The new role of the government in the stock market. Is the stock market still independent?
Although the state cannot support the stock market directly, it possesses an instrument that is able to shape the condition of the economy per se. This instrument is the aforementioned monetary policy, conducting by The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed). By lowering or rising interest rates, the Fed influences cost of deposits and credits. Higher interest rates make people more willing to save. Lower, by cheaper loans and credits, create a additional encouragement for business activity and spending. But there is one more effect of any change in interest rates. There is an old stock market adage - “do not fight the Fed”. It meant that when the central bank is easy on money, it is bullish for the stock market, so any investor with free money should buy stocks.
The government’s attitude toward the rising stock market can be seen from the angle of famous phrase “Irrational Exuberance”. This term was used by the Fed chairman Alan Greenspan in 1996 to describe the dot-com bubble and, more broadly, the fact that the markets were overvalued. His words provoked waves of selling shares throughout the world's financial markets. But in the ensuing months, Greenspan backed away from his earlier statements, noting that the surprisingly strong growth in productivity and corporate profits may indeed justify higher stock prices.[3]
Notwithstanding, it was only a prelude to propping up the stock market directly. When in 2000 it crashed and the economy fell into recession (NASDAQ had already lost about half of its value from top), on 3 January 2001 Alan Greenspan unexpectedly cut interest rates. On 5 January 2001 Barry Grey wrote:
The US Federal Reserve Board's surprise .5 percent cut in interest rates January 3 sparked a heady one-day rally on Wall Street. (…)The statement issued by the Federal Reserve was clearly intended to impact that day's trading on stock and bond markets, and avert a round of panic selling.[4]
Lowering interest rates, Federal Reserve implied that it is keenly interested in rising stock market - regardless of whether or not should influencing it. This first cut originated the sequences of 13, that ended 3 years later at 1%, what was then a 46-year low.[5]
In spite of these cuts the stock market was falling until October 4, 2002 when it reached bottom. The index of broad market S&P 500 fell to 798,8[6] and the US economy in the third quarter of 2001 entered a recession.[7]
[1] http://www.sec.gov/rules/concept/34-42037.htm
[2] http://www.journeyofhearts.org/kirstimd/911_cope.htm
[3] http://economistsview.typepad.com/economistsview/2006/12/rational_exuber.html
[4] http://www.wsws.org/articles/2001/jan2001/fed-j05.shtml
[5] http://www.tradingeconomics.com/united-states/interest-rate
[6] http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=SPX
[7] http://www.sjsu.edu/faculty/watkins/rec2001.htm
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