Imagine if the outcome of a football game depended more on the weather than on the talent of the players.
Weather, indeed, can have an impact and should, but its role is usually to test the talents of the players, not to be the primary factor in the outcome. When it is the primary factor, anything can happen. In such cases, would you put money on the game?
The weather is not the number one factor affecting the performance of the stock market these days, but neither is the talent of the players – that is, the fundamental performance of publicly held companies.
In recent years, The Federal Reserve Board has held sway over the market’s performance via quantitative easing, although under former Chair Ben Bernanke, it was somewhat more predictable than the weather.
Now, with tapering under way, that may change (we’ll see, as many expect plenty of bond buying ahead). Yet other world events may replace QE in determining the performance of the market. That means potentially greater volatility than we’ve experienced in the easy money era.
It doesn’t take much to affect today’s global economy, especially when the impact of events is amplified by high-frequency trading. Consider, for example, the impact of the falling yen and Australian dollar on the S&P 500.