Topsy-Turvy Dow Continues it’s Wild Ride on Wednesday

Wednesday added to the consecutive string of consecutive days that featured out of the ordinary equities trading patterns, with the Dow Jones Industrials dropping 733 points, the second largest point drop ever for the index of U.S. blue chip stocks. The drop was immediately attributed to tight credit markets and to consumer spending numbers, which indicated that retail sales dropped 1.2% in September, a much steeper decline than the expected .7%. So-called investors, knowing that consumer spending accounts for nearly 70% of U.S. economic activity, took the news to heart, driving the equity markets down again amidst the wildest ride the stock market has seen since the Great Depression.

The Federal Reserve also was helpful in pointing out that tight credit markets are stifling businesses around the country, making it difficult to invest in new initiatives, plants, and personnel hiring.

Those are the facts, but we take this opportunity to opine, as it were: While the news is yet another disheartening reminder that the current economic climate in the country is bleak, those on "main street" - to borrow a phrase from the politicians in the current presidential campaigns - should understand that the ubiquitous stories of economic malaise and battered stock markets offer a rather dubious definition of the term "investor" – thus the quotes.

When we hear the term "investor," we generally think of people "like us," who save a bit of money each month or out of each paycheck to put towards future purchases, retirement or college tuition, among other things. The reality, however, is that the "investor" referred to in the stories that are coming out of every media outlet in the world are in many cases actually traders. Put another way, they are folks who gamble on the market going up or down on a daily basis, and "invest" in the market only in the sense that their money is technically tied up in equities for short periods of time as they gamble on the market’s general direction.

More to the point, this same group is often not buying and selling (notice that we don’t use the term "investing" here) equities at all, but rather the underlying derivatives that have become the darlings of the investment world over the past several decades. Call options, put options, straddles, credit swaps…all methods of playing the market in the short term and entirely different than the long-term investments that are common to the average Joe. Though the gamblers are necessary to create market liquidity, their actions should sometimes be taken with a grain of salt, because anyone who reacts so violently to news that is indicative of short- to intermediate-term events is clearly NOT "investing" at all…merely playing the market as it bounces up and down.

Painfully, however, the average investor IS affecting the market by panicking. Mutual funds, finding it necessary to make payments to investors (sans quotes) who are bailing out of the market, are finding it necessary to sell shares of their equities positions to make those payments. Unfortunately, when large funds liquidate their positions, it can wreak havoc on markets, because the shear size of those positions moves markets quickly. As for the investors selling mutual fund shares amidst the panic…well, let’s just say that "selling low" goes just a bit against the grain of logical investment advice.