One of the greatest challenges when trying to understand the financial markets is recognizing that the “price” or “value” of a security is driven by what people are willing to pay for it above all else. This value is driven by 2 primary factors: 1) how the company/asset underlying the security has performed in the past and 2) what investors expect out of the asset/company in the future.
Although the first factor can sometimes be complicated and hard to pin down, it is the second factor that drives price appreciation and today, depreciation.
As the uncertainty of the implications of our over-indulgence in the credit markets looms overhead, investors around the globe are increasing the discount rate of their future expectations – which by definition reduces valuations.
The VIX continues to spike and speculation is running rampant that the Fed is talking out of both sides of its mouth…all of this is like a deluge on the expected values of securities across almost every market.
Predicting the future is hard…especially when it comes to weather and people.