The stocks contingency behavior gives us a good illustration of the very definition of contingency. The whole community of experts, financial analysts, and macro economists are at pains when it comes to them to extract from the stock index curves some truth that may pave the way for tomorrow. Unfortunately, the past scarcely tells the shape of the future.
Though quite an already old event, the world economy in the 1998 happened to exemplify how analysts could be misled by facts and figures of the day. People started to be scared by the amount of consumer credit in the US, at its highest level ever. How could the economy sustain such momentum in consumer credit which fueled stock growth? “Bust” should have quickly followed “Boom”. It did not and experts were many to comment on the defusing effect of decreasing interest rates on average consumer debt service amount. Or, better said, “Bust” did not follow “Boom”, straight away. It had to wait until 10 years later, with the global financial crisis. In the meantime all stocks index went strongly upwards, driven by internet and financials.
And what is to be told about today? Once more, Stock analysts are facing challenge about what is a stock fair price. When a stock is valued 10 time its share of profits, it looks like a good bet, at least when compared with the current long term interest rates. When a stock is valued 20 times its share of profits, it deserves the recognition of “speculative”, but if the profit underlying growth is more than 5%, it remains a reasonable bet, at least for “volatility traders”. But what if a stock is at a price to earnings of 81x, or of 133x? It becomes an issue for hope for optimistic people, but or a matter for concern, for less optimistic people.
Far beyond such patterns, the dominant driver remains how psychology reacts to events. Maybe the mere intelligence of the economist or of the financial analyst is lagging well behind the overheated psychological attitude of stocks players.