Markets go bananas yet again

Wall Street plunges, Australia follows. We shed some optimistic light on these crazy markets.

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Wall Street plunges, Australia follows. The Motley Fool sheds some optimistic light on these crazy markets.

Every day we Fools keep our fingers on the pulse of the market and watch for stocks making big moves.

Sometimes these pops and drops mean something and sometimes they mean nothing, but either way, we're here with our industrial-strength shovels to do the digging and fill you in on the "whys" of these swings.

Down & dirty stocks

Of course recently it's been less a matter of individual stocks getting down and dirty, and more a matter of the entire market going absolutely out of its mind.

As U.S. stock markets career deep into the red again, we can certainly point to a number of potential reasons that investors are jamming the "sell" button so hard that we could end up with a stock market version of Stomp.

  • Initial U.S. unemployment claims came in above expectations.
  • The Philadelphia Federal Reserve's report on area manufacturing plunged, increasing the likelihood of a double-dip U.S. recession.
  • Investors fear that major banks like Bank of America and Citigroup may be in worse shape than they're letting on.
  • There are concerns that European banks like Barclays and Lloyds Banking Group could make B of A and Citi look positively healthy.
  • Growth has slowed in Germany and France, the two countries that have been the Atlas of the Eurozone.

Catching the flu

In short, the global economy is in a mess. And even though the Australian economy, by comparison, is a shining beacon, we are not immune to these international forces.

Try as we might to decouple from the U.S., the old saying of "when America sneezes we catch a cold" still rings true today.

In fact, looking at this chart, taken from when markets last bottomed in March 2009, by comparison to the U.S. market (blue line), the Australian market (the red line) has caught a severe bout of influenza.

Source: Google Finance

Life can be cruel, as can be investing, in the short-term.

But on the flip side of the picture:

  • A different U.S. report on leading economic indicators showed stronger-than-expected growth.
  • Australian interest rates have plenty of room to come down, unlike those in Europe and the U.S.
  • Australian unemployment is hovering around 5%, hardly cause for major concern.
  • Recent results from companies like Wesfarmers (ASX: WES), ASX Limited (ASX: ASX), AMP Limited (ASX: AMP), Adelaide Brighton (ASX: ABC), Village Roadshow (ASX: VRL), REA Group (ASX: REA) and Blackmores (ASX: BKL) were all well received by the market.
  • Even after a historic downgrade by Standard & Poor's, bond investors continue to treat U.S. Treasuries as the ultimate safe haven.

Old bad news

In other words, it's not necessarily that there's just bad news now, it's that the media is focusing on the bad news.

And much of that bad news isn't even new. Banks around the world have been loping along for years now, so should anyone really be shocked to think that they're not magically healthy again?

And the second-quarter growth numbers from Germany and France are days old now, which may seem pretty fresh except when you're trying to pin it as a reason for today's decline.

So why is the market really falling?

It's because when you look at the stock market over short periods, the movements are dictated by investor emotion, not some actual calculation of the value of individual stocks or the stock market as a whole.

Add in the massive amount of trading done by computers running on algorithms, and you simply douse that emotional fire with a drum of petrol and end up with the hugely volatile days we've seen over the past couple of weeks.

As for the headlines, that's just the media trying to grab readers by giving them what they want — a reason for the madness. But the selling today isn't because of the Philly Fed report or Germany's growth. It's because pessimism has flooded the market and made sellers more motivated than buyers.

Take a closer look

We don't think we're going out on much of a limb when we say the combined value of the companies underlying the S&P/ASX 200 didn't change 3% today.

Similarly, it's highly unlikely that the value of Oil Search (ASX: OSH) the company fell 6% today or that IOOF Holdings (ASX: IOOF) is really worth more than 6% less than it was yesterday. And the same could be said of Worleyparsons (ASX: WOR), Iress Market Technology (ASX: IRE), BHP Billiton (ASX: BHP), or any number of other companies being whacked by the sell-off.

As we at The Motley Fool repeat almost to the point of broken-record status, it's this kind of attitude that can create opportunities for investors that put on their Zen caps and look past the whirl of ticker tape to the actual operating businesses that underlie the paper that's being set on fire on days like today.

If you're looking for stocks that may been rashly sold off, you might find a couple in our free report, 2 Safe Ways To Play The Commodity Boom. Click here to grab a free copy.

Motley Fool staff and freelancers may have interests in any of the stocks mentioned in this report. These interests can change at any time. The Motley Fool has a living, breathing disclosure policy.

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