The Market is Driven by Emotions

On Wall Street, stock prices rose slightly on Thursday, following significant fluctuations throughout the day, depending on comments from politicians regarding the ‘fiscal cliff’.

The Dow Jones index strengthened by 36 points, or 0.28 percent, to 13,021 points, while the S&P 500 increased by 0.43 percent, to 1,415 points, and the Nasdaq index by 0.68 percent, to 3,012 points.

Trading remained very uncertain yesterday, as it had in previous days, because no one is sure how negotiations between Republicans and Democrats over reducing the budget deficit will end in order to avoid automatic cuts in budget expenditures and tax increases at the beginning of next year, which would push the U.S. economy into recession.

The day before, stock prices had risen significantly after a statement from John Boehner, the Republican leader in Congress, that he was optimistic about avoiding the ‘fiscal cliff’. However, yesterday, Boehner indicated that there was no significant progress in the negotiations.

As a result, stock indices were slightly in negative territory and slightly in positive territory.

-This is emotional trading, with sharp sell-offs, but also purchases after price drops because investors do not want to miss a potential rise in stock prices if an agreement is reached. This madness will continue until the ‘fiscal cliff’ issue is resolved-, says James Dailey, portfolio manager at TEAM Asset Strategy Fund.

Consequently, new positive macroeconomic data did not particularly impact the market yesterday. According to the second estimate, the U.S. economy grew by 2.7 percent in the third quarter, significantly higher than the initially estimated 2 percent.

It was also reported that in October, existing home sales rose more than expected. As a result, the PHLX index of the construction sector strengthened by 0.8 percent yesterday.

On the other hand, stock prices in the retail sector fell as data showed that in November, following Hurricane Sandy, sales were weak.

Kohl’s stock price fell by 15 percent, while Tiffany’s shares dropped by more than 6 percent after the luxury goods retailer lowered its sales estimates for this year.

Investor caution is indicated by below-average trading volume. On Wall Street, Nasdaq, and NYSE MKT, 6.15 billion shares changed hands yesterday, while the average daily volume this year is 6.5 billion.

European stock prices also rose yesterday. The London FTSE index strengthened by 1.15 percent, to 5,870 points, while the Frankfurt DAX rose by 0.78 percent, to 7,400 points, and the Paris CAC by 1.53 percent, to 3,568 points.