On the surface, contemplating the answer to this question seems merely – interesting. That is, if you’re given to this type of speculation at all. Otherwise it may fall somewhere between garden variety conspiracy theories and aliens in the cornfields. So why even ask is the stock market rigged?
If you have a significant portion of your money invested in stocks, the answer to this question might be more important than it seems; it may define how we approach investing in the stock market!
In my younger days – back when I believed the world truly was the place it seemed to be – the idea that an investment conglomeration the size of the stock market might be manipulated to any serious degree was just beyond my paradigm. After all, if that’s the case then how do you plan a strategy for it? (Which actually is the point of this post, but more on that later.)
The Evidence of Stock Market Rigging
The performance of the markets over the past 20-25 years has to make even a cynic wonder if there isn’t some coordinated effort taking place. Think about it: extended periods of steady, predictable, virtually relentless market increases, followed by punishing crashes. That includes three since 1987, to be exact.
Either we’re experiencing mass hysteria on the way up AND on the way down, or something else is taking place. When that “something else” works, it works flawlessly (the extended bull markets). But then those are followed by a wealth-draining crashes that undermines the entire credibility of the escalator ride that preceded it.
There’s a disconnect in there somewhere and that opens up some interesting contemplation.
As I see it, there are three possibilities:
- The stock market IS rigged.
- The stock market is just doing what it does naturally.
- Or perhaps the stock market is doing what it does, but subject to incidental influence.
Let’s consider each possibility in greater detail, and more importantly, the implications for strategies to play them.
The stock market IS rigged
The evidence for rigging:
- The extended bull market/crash cycles have become too predictable to be explained by mass human behavior. Even in a herd, we’re just not that rational.
- There’s an obvious and growing disconnect between the stock market and the real economy. The market has shown that it will rise even during the worst circumstances.
- During the bull market phases, corrections of more than 10% are virtually unknown. Natural human behavior doesn’t support that level of consistency.
- When the market is rising, any news is good news. Or put another way, nothing can derail the bull.
- The stock market is a critical barometer of the health of the economy and the political implications that carries. For this reason alone the potential for manipulation cannot be dismissed easily.
And now the obvious question: why the crashes if the bull markets are so well orchestrated?
That’s the problem – they work too well. The only thing that can stop them are periodic system hemorrhages, which may be why the crashes have become as regular, predicable and extreme as the bull markets themselves.
A strategy to play the rigged markets: Buy in after the next crash and hold until valuations become ridiculous. They will, and if the pattern holds, they’ll stay there for longer than anyone thinks they can (still more evidence of manipulation). Sell when you think that point has been reached. As a fail safe, sell on a 20% market slide. That’ll be solid evidence that the manipulators have lost the handle on the run up and something worse is coming. As to stock selection, get as close as you can to the latest edition of the “Nifty Fifty”. Or, failing that, punt and go for index funds – you’ll win either way. The deck is stacked so it’s guaranteed!
The stock market is just doing what it does naturally
The evidence for natural cycles:
- The stock market has always swung in both extremes as part of the ebb and flow of economics, world events and collective psychology.
- The economy goes in boom/bust cycles, which affects the swings in the market. That said, the historic correlation is more approximate than exact.
- The disconnect between stocks and the economy is more of a timing issue. As a speculative venue, the market will rise well in advance of an anticipated economic recovery.
- Crashes are driven by nothing more sinister than human greed coming to its inevitable conclusion.
A strategy to play the natural market: This is the most chaotic of the three possibilities because no one is driving the market in one direction or the other. Valuations and individual stock selection are critical if this is the environment we’re truly in. Playing the averages through buy-and-hold will be a suckers bet, especially in a choppy economic backdrop.
The stock market is doing what it does, but subject to incidental influence
The evidence for incidental influence:
- Interest rates are influenced by the Federal Reserve to control inflation and economic growth. Low interest rates are good for the economy, and also favored by investors.
- Money supply is also used by the Fed to control inflation and economic growth, and has a secondary affect on stocks, one way or the other.
- The government will pursue overall policies of economic stability and growth, which benefits the stock market.
- By promoting free trade and certain foreign treaties, the government seeks to improve the country’s international position, which is seen as a positive by investors.
- It’s highly doubtful that the stock market figures into the government’s decision to take certain military actions. But Wall Street seems to like them nonetheless.
- Exchange traded funds (ETFs) have exploded in popularity in recent years. The steady stream of retirement funds into ETFs keeps the market moving consistently higher. (Sidebar: ETF investing is less about investing in stocks than it is about investing in markets. Fundamentals aren’t even a factor with these funds.)
In each case, there’s an intentional action by either the Fed or the government that has some affect on stocks. Because the Fed and the government seek positive directions, the effect on the market, if it’s apparent, is mostly incidental.
A strategy to play the incidentally influenced market: Very similar to that used for a rigged market. The net effect of an influenced market can be indistinguishable from a fully rigged one. The elevator is programmed to rise, but its course isn’t as certain. Invest in the Nifty Fifty or index funds, but valuations can’t be ignored in this scenario.
My thoughts – for what they’re worth
In my opinion, we’re sitting somewhere between incidental influence and a fully rigged market. The consistency of the markets – the relentless and prolonged rises, periodic crashes (we went nearly 60 years without one before 1987) and the fact that the market seems to close higher on most Fridays – seems like too much to ignore. Nearly every major sector of the economy is in some way propped up by the Federal Reserve/Federal Government. The stock market is too big and too important to be ignored. And so is the volume of money it contains!
Do you think the market is rigged, influenced or in a completely natural state? How do you recommend playing it, especially if you think it?s rigged or influenced?