Fluctuations

The stock market is quite particular, in as much as the commodities that are bought and sold have no use value, only exchange value. They are perpetually moving from one account to another without going anywhere. This is not a closed circuit, however, as bonds and shares come on to the market or leave it on a regular basis. Just as more cash and credit can invest the market or be drawn out. These fluctuations influence prices pushing them up or down, but there is also a correlation between shares and bonds. Dividends are compared to interest rates. Dividends fluctuate as they depend on company profits and the number of shares, whereas interest is contracted and printed on the bonds when they are issued. However, this nominal rate of interest is modified when the price of bonds is above or below their face-value.

Investments on the stock market move around in search of the best return (1). This mobile demand tends to level the ratio of price to earnings. It is observable in the prices of shares and bonds that move up or down to balance the revenues they generate. If company profits increase, share prices will go up to compensate the rise, but bond prices will go down, thereby increasing interest rates to a new equilibrium. If company profits shrink, share prices will fall and bond prices will rise to reduce interest rates and attain a new average return between the two. This involves investments moving from bonds to shares or shares to bonds. In normal times, company profits determine these fluctuations, with bonds merely reacting. In abnormal times, central banks intervene on the bond market and push interest rates down to zero. And when interest is close to or below zero, an equivalent price to earnings ratio for companies pushes their share prices sky high, even on small profits and dividends. Anything is better than nothing. Central banks have turned the stock market upside-down, and share prices are stratospheric. It is difficult to see how normality can be restored.

1. A fair proportion of transactions on the stock market are just buying to sell or selling to buy, gambling on the way prices will go, up or down. But the revenue from the ownership of shares and bonds used to be substantial enough to fund pensions, insurance and lives of leisure. Those incomes have shrunk to next to nothing, so that share and bond markets are subjected to ever increasing levels of speculation, and the institutions that depended on them are in trouble.