Market Behavior

The stock markets have been very volatile in the past few days and that can be noticed by movements in the volatility index (VIX) in the past few weeks. A state of confusion prevails as we start the day, if we wake up hearing that Europe had a reasonably good day and Euro gained strength, the futures start rising. All of us know that market news has significant influence on its behavior. However the impact of market news should not be that significant that it becomes the most influential factor as economists, analysts are all working in the normal course and markets are expected to bake in the good or bad news in its pricing as it moves along with the exception of the unexpected news such as the oil spill or an unexpected disaster like the World Trade Center attacks caused by terrorism etc.
Going a step further we are now lead to believe that the economists and analysts are unable to make a reasonable assessment of the state of the union or economy and the fundamentals are subject to higher levels of volatility causing the market to react just for the day or a short period and not looking beyond. This in itself creates volatility. It is for lack of a better word the "Inability" to make reasonable assessment of the future trends that is causing volatility.
It is important for the world leaders to interact and work together as a team to enforce stability and Governments have to support each other to the extent that the world economy does not suffer as the consequences are far reaching and if the US has a cold, India and China may get the flu, has anyone ever imagined what will happen to China if the US decides to no longer import any goods from China? It is a possibility although not a healthy option for both countries. Similarly the European crisis is not restricted to just Europe and can have its consequences go far beyond. The earlier we get this World union the better it is for the future.

What Next?

With the financial markets in a state of confusion for the past two weeks, what is in store for investors? Investors have been left wondering as to how they should grow their wealth. The traditional forms of investment are not working. The mantra of stocks/bonds mix is proving to be a disaster. Underlying all of this is "Correction". Markets were over heated in the period 2000-2010. In reality an economy is expected to grow in the range of 2%-5% with an inflation rate of about 2%. Markets have deviated way off from the economic fundamentals. Investors got lured in the rising stock markets based on anticipation and expectations that are completely unreal and not based on fundamental growth rates. The mismatch will seek correction and also instill volatility as there is panic and confusion. Also adding to this confusion is the inability to assess the damage likely to be forthcoming from the European economic woes.

In this state of confusion, an average investor is better off creating a portfolio mix that has some % allocated to precious metals like Gold. Invest into growing countries like India, Brazil and China. Stay away from Europe for some time until confusion resolves.