They free markets take into consideration all the information thats out there when assessing a price of an instrument (equity/bond etc).
However, what I sense is there is a lot of growth in prices simply because of optimism and not neccessarily due to any solid financial or economic reasons. Like right now people expect the economy to grow significantly and equities this year have been way higher then they were last year yet the growth does not really imply all sectors. Most of the growth this year has been in manufacturing (cars) housing and defence… arent we just heading for another bubble?
^the free markets assume that all information pertaining to any given matter is available to all the stakeholders at one and the same point in time. Its a big assumption. In today's markets, there is a price on 'information' and the 'timeliness' of that information. Take for e.g., your equities market. If you are able to get a relevant piece of information earlier than the others (say for a bank, you realize one of its bigger clients has defaulted which in turn would have a depressing impact on its share price), you can offload that much earlier and gain that much more.
The increment in prices, due to optimism that is not backed by solid economic or fundamental reasons is what speculation is all about. An interesting perspective to this is that this optimism also sometimes leades to 'self-fulfilling prophecies'-however, for that to occur, this optimism needs to be uniformly distributed across all sectors and stakeholders. If this does not occur, then this optimism merely gets reduced to a bandwagon effect and all stakeholders tend to lose when the bubble bursts.
I am not sure if i have addressed your true concern, but just thought like putting in a few words :p
optimism impacts financial markets just as muich as pessimism does, remember when the dot com bust was going on, some companies with pretty sound business case and positioning were hurt in the process. Now in some cases the pessimism became a self fulfilling prophecy, and in some cases it weeded out the junk that was out there, but many companies that were just getting on their feet were impacted big time.
Now lets look at optimism, as important as it is, would it be sufficient on its own to help some company which has issues..no, real positive performance, along with optimism is what will be needed. just optimism can carry them for sometime but thats about it.
^ right. Btw, it reminds me of a silly joke about management (i forwarded it to my boss too ) which said, bullsiht can take you to the top, but it can’t keep you there!
) which said, bullsiht can take you to the top, but it can’t keep you there! 