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Business Intro

  • Date Submitted: 12/04/2011 07:21 PM
  • Flesch-Kincaid Score: 58.7 
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Intro to Business 101
A recipe for stock market volatility
By: Chapel Hill, N.C
http://beta.finance.yahoo.com/news/recipe-stock-market-volatility-040142519.html
The main issues involved in the U.S stock market in the 21st century, which is very risky but very profitable or very losing. Stocks are like a rollercoaster nowadays, there’s no safe stock, as stated in the article, this week particularly on Monday the U.S stocks reported a $268 billion loss, followed by a $271 billion gain on Tuesday. This will persist as long as no major asset class offers attractive long term returns. Because of this situation many investors are left with very few alternatives, perhaps if an investor decides to get out of stocks, where is he going to put his money? The only market that is large enough to be a major alternative to equities is the bond market which real rate of return right now is clearly negative. This leads to the stock market not being supported by fundamentals but just by investor psychology. And since investors are mostly skeptical, the market is ‘’unusually susceptible to mood swings among investors.’’
The presented evidence prompts into placing the current situation in the stock and bond markets in an historical perspective. As shown in the database maintained by Yale University professor Robert Shiller, which contains monthly readings back to 1871 for the stock market, it is clear that during all these years the version of the price/earnings ratio been very high when the bond market offered such low expected returns. In fact only 25% of the time since 1871, was Schiller’s price/earnings ratio than it is today. The early 2000 was the all-time peak level for the ratio, right before the internet bubble burst. The 10-year treasury yield stood at 3.9%. The second highest level of the 140 years of Schiller’s P/E was in early fall 1929, right before the 1929 stock market crash when the yield was declared at close to 3%.
As of today, the 10 year treasury has...

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