All markets experience cycles of good times and bad times, whether you are talking about the stockmarket, currency market, commodity market or the local fruit and vegetable market.
There will be optimistic times when prices are rising, and people are prepared to pay top dollar for everything, whether its shares or bananas, even though they may not be in the best shape. In these times, people have money, and are often a little complacent after several years of good times. They are quick to pull out the wallet or purse and hand over their hard earned cash.
They don’t mind if the prices are a little bit more than they should be, or if the banana is a little bit bruised.
Then, there will be times of pessimism, where people are extremely careful with their money. The highest quality shares or the best crop of bananas can still sell for much less than their true value, because all of a sudden people are focusing on the negatives. The bananas look smaller, or a different colour, or not as fresh. The company earnings didn’t grow as much as the company forecasted.
The financial markets experience their own cycles of optimism and pessimism, but thankfully, they won’t all go through these cycles at the same time.
Most people can tell you that the sharemarkets have had a bad year in 2008, losing around half their value from their 2007 highs. But fewer people can tell you that the US Dollar has had a bumper year, gaining 25% from its April lows.