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Market volatility is no surprise

The volatility in the stock market, especially the Nasdaq, is a classic indicator of the transitionary nature of the times.

The sun has not yet set on the old economy and the new economy has only partially emerged.

That process of emergence features a plethora of new products and services, new firms and whole new industries.

At the same time, a vast number of traditional industries have begun to adapt to the demands of e-commerce.

What is frustrating, however, is that no-one knows how the new economy will work.

In recent years the only tools at our disposal have been those of analysis and valuation which have served for generations.

The float and sale of a spate of dot.com companies in the last twelve to eighteen months has made it clear that standard concepts of valuation don’t translate effectively to the current market.

The use of the traditional PE ratio in establishing value seemed irrelevant. In most instances it boiled down to a tussle between projected and historic sales volumes.

By their nature, most dot.coms in the early stages of existence have been unable to demonstrate a history of sales.

Consequently, it seems that, in the last year, valuations have been established on a fairly unscientific basis.

In global terms, the engine room for the new economy has clearly been the US.

The long boom of the 1990s and the leap in equity values have been built on major secular shifts in the US economy.

The revitalisation of US manufacturing and the explosion of activity in the new high value-added economy associated with computing and tele-communications rewrote the macro economic rule book.

As a result, the US has enjoyed an extended period of sustained low inflation, sustained economic growth and an explosion in jobs – particularly at the high income end of the spectrum. In general terms, real incomes also rose significantly.

These fundamentals have produced the environment for substantially increased investment activity.

Human nature ensured, eventually, activity would translate into excitable market behaviour.

The world has been expecting a major correction in equity prices for some time. The only arguable issues were the timing and magnitude of the correction.

When it occurred in mid-April it was hardly Armageddon. It certainly was not as dramatic as Black Monday in 1987 when the Australian market collapsed by 22 per cent in one day.

After the correction, which may not be the last in current terms, the market remains unpredictable and volatile.

Once again the world’s stock markets, like the world’s political democracies, have demonstrated a great propensity for wide swings in behaviour and mood.

However, despite their clumsy inefficiencies, both institutions outperform the highly structured and tightly controlled alternatives.

• Mal Bryce is chairman of Celebrating Lives and a former WA Deputy Premier.

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