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December 24, 2008

Big swings in stock prices

It seems that the stock market, at least recently, has gone through wild gyrations. One day the market is down 3 percent, and the next, it rises 3 percent. And of course over the last year, some broad measures of the stock market are off almost 50 percent. Why does the stock market change so dramatically?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think because the stock market is actually a reflection not only of today but of tomorrow. And you can think of a price of a stock, a stock value if you will, as reflecting those long-term prospects for that particular company as well as the economy. So that means that what look like small changes in the economy are multiplied over many, many years as stock holders and stock buyers look forward to what those impacts will be many years down the road. And so that is going to result in major swings, as you've cited, in the stock market, both up and down, particularly when the economy is going through change as it is now. There's so much uncertainty about where the economy is going, how deep the recession will be, when will we get out of the recession. Every little piece of news that comes in adds to those forecasts about where the economy is headed. And then you multiply them by the fact that any change today has these multiplied effects over many years. The bottom line is that's why you get these big, big swings both up and down in the stock market."

Posted by Dave at December 24, 2008 08:00 AM