Local Wall Street Experts Explains Why The Stock Market Acts Irrationally
PITTSBURGH (KDKA) -- For anyone with retirement funds in the stock market, it's pretty hard not to be nervous even if financial advisors say, "just hang in there."
"When you see your portfolio sort of disappearing before your eyes, then that becomes very difficult to hang in there," Prof. Jay Sukits of the University of Pittsburgh's Katz Graduate School of Business told KDKA money editor Jon Delano on Thursday.
Delano: "I haven't looked at my 401-K."
Sukits: "That's sort of the best thing to do. Don't look at it for a while."
Sukits spent 24 years on Wall Street with companies like Salomon Brothers, E. F. Hutton, and Smith Barney.
He said the stock market does crazy things for silly reasons.
"In the short run, it's very irrational," he explained.
"It's almost always an over-reaction, especially to the downside," Sukits noted. "We've seen this going back at least two years now where any little piece of bad news tends to trigger a lot of selling, so it looks like the market creeps up like a staircase, like an escalator, and then when some kind of bad news comes, whatever it might be, it drops down like an elevator."
That happened on Wednesday when the Dow dropped 800 points because interest paid on a two-year bond note slightly and temporarily exceeded interest paid on a ten-year note.
"Many people in the market interpreted this as a harbinger of a potential recession," Sukits said.
Sukits said sell-offs are exacerbated by computerized trading that reacts to numbers, not common sense.
Another problem: ETFs or exchange-traded funds.
"Instead of trying to trade 500 stocks in the S&P 500, they can literally trade the entire S&P 500 in one of these exchange-traded funds," he said.
Then there are traders, not investors, who want the market to crash to make millions of dollars.
"They make money if the market is going up or if the market is going down because what they're doing is selling short," he explained. "They're selling something they don't own with the idea that they're going to buy it back later at a lower price so, between the price they sold it at and the price they buy it back, that's all profit to them."
For the rest of us, Sukits said, remember, "the market usually comes back to its old highs."
But never as quickly as we'd like.