Once the selling started and the economy didn't collapse, buying started and shares tended to rise across a much broader front. None of this is healthy. Panic selling combined with frenzied buying tend to appear only in overvalued markets whose behaviour is more akin to musical chairs rather than considered appraisal of a stock's potential value. Similar behaviour was observed during the South Sea Bubble, the '20s stock market boom and the so-called greedy '80s. I shall not try to fathom the psychology of the crowd, but what is of interest is what fuels its endeavours.
Shares have to be paid for and enormous sums are now exchanging hands.
Of course, the booming economy and the rise in incomes are fuelling the market, or so we are told. Taking the Socratic approach we should pursue a line of questioning that cuts through the hyperbole and rationalisations until it comes to rest at the correct answer. My regular readers will know that this bring us to that inveterate old rogue we call credit expansion. As I never tire of pointing out, the Fed has let loose and allowed broad money to grow at about 11 per cent annually. This, by any measure, is a very high rate of monetary growth and by its very nature has artificially pushed down interest rates, which is the Fed's intention anyway.