The Dow finished up 936 points (11.08%) today. Last Thursday, it finished down 679 points (7.33%). Two weeks ago, on Monday, September 29, it finished down 778 points (6.98%), and the next day, it rose 485 points (4.68%). These are nothing like the gyrations of 1929 through 1933, but they are enough to make your head spin. Check Wikipedia for the complete list of Dow gyrations.
Why does this happen? In one word -- uncertainty. Markets hate uncertainty. When the House failed to pass the Emergency Economic Stabilization Act of 2008 on Monday, September 29, the markets felt they had nowhere to turn for relief and plunged. The next day, after statements by President Bush and congressional leaders, the markets bounced back in anticipation of House passage later in the week.
Last Thursday, as the world's finance ministers and central bankers assembled for the annual World Bank/IMF meetings in Washington, D.C., the markets feared lack of consensus among world leaders on further steps to restore credit markets and plunged. Today, they felt reassured that coordinated worldwide intervention in credit markets would be forthcoming.
One of the reasons political leaders often have problems with the markets is because when they deliver what the markets ask for, the markets often are not satisfied and demand more.
Confidence and trust are the basis for every economic transaction. When confidence is shaken, restoring it is not easy. Often it takes many missteps. Treasury Secretary Paulson thought he and Fed Chair Bernanke had done enough on several occasions this year, only to find that more needed to be done. It's like when you slip on the sidewalk and attempt to keep your feet under you; it often takes several quick steps to stay upright.
The good news is that forceful and coordinated actions are being taken around the world. They will take time to have their full effect, and a sharp recession seems likely for the next six months. Despite fearmongering by the media about a Depression, we will emerge from that recession next year with nowhere near the market gyrations that were experienced from 1929 through 1933.
