Dow Jones Industrial Average, S&P 500: Market Intervention Has Left Investors Confused

bearbull21Chris Ciovacco: We have covered the topic of investor indecisiveness numerous times in recent months. This week, bank executives cited investor uncertainty as an ongoing drag on trading revenues. From The Wall Street Journal:

Executives from some of the biggest U.S. financial firms said a slump in trading that has hammered bank results for more than a year is likely to continue to weigh on profits. Large investors are retreating from the market, big trades are rare and price swings are shrinking, executives told investors at an industry conference in New York on Tuesday. Citigroup Inc. C -0.02% Chief Financial Officer John Gerspach told investors the bank expects the slide it has reported in markets revenue to deepen in the second quarter. “People lack direction,” Mr. Gerspach said, speaking about investor behavior at the conference sponsored by Deutsche Bank AG. “People are uncertain. There just isn’t a lot of movement.”

2008-2010: Free Markets Were Not Free

Why are investors confused? Markets have an almost infinite number of moving parts, which makes isolated cause and effect analysis difficult. However, common sense tells us the recent “lack of direction” from investors stems from a logical question they have been asking themselves:

“Is the stock market higher based primarily on an improving economy or market intervention?”

Investors, large and small, are accustomed to making financial decisions based on easy to understand economic concepts, such as the law of supply and demand. Market intervention from policymakers and central banks has muddied the free market waters. The current bull market was kicked off by a series of bailouts back in 2008-2009. Below is a small sample of the steps taken during the financial crisis to boost free markets:

  1. The Troubled Asset Relief Program (TARP) was a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector. The TARP program originally authorized expenditures of $700 billion.
  2. Fannie Mae and Freddie Mac were placed into conservatorship (bailed out).
  3. IndyMac Bank, America’s leading Alt-A originator in 2006 with approximately $32 billion in deposits was placed into conservatorship by the Federal Deposit Insurance Corporation.
  4. AIG received an $85 billion emergency loan in September 2008 from the Federal Reserve.
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