How Corrupt are US Capital Markets?
Why has the US stock market done so well in recent months--the Dow increased over 30% since its low on March 11, 2003, and closed above 10,000 on December 11--even with the media reporting one financial scandal after another? We have seen Enron-style fraud from corporate management, Arthur Anderson-style smoke and mirrors from accountants, and now Putnam Funds-style market-timing irregularities from mutual funds. After all this dirt, why aren't more investors voting with their feet?
The most important reason is a sharp improvement in corporate earnings, and in economic conditions in general. The scandals may be pushing the boat of market sentiment downwards, but their effect is being overwhelmed by the rising tide of economic prosperity, at least for now.
To be sure, television, radio, newspapers, magazines, and Internet sites have been hyping financial misconduct, awakening and shaping the type of emotional responses that often have a powerful influence on financial markets. But attention-getting emotions (such as anger) are not the only factors that drive investment decisions.
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