what really drives financial markets

The answer is Crowd Psychology

First of all, you need to think about what a market is. A market is people. A market is a crowd of people or a herd. Whether we are talking about a flea market, the share market, the property market, an auction room or a fish market, a market is simply a place where people buy and sell shares, propety, antiques, fish or fleas! It is a place where crowds gather.

The Madness of crowds
An old philosopher once said that as individuals, humans are basically sane beings. But as part of a crowd they become blockheads.

Crowds panic at times. The Herd Mentality of humans causes them to do things in groups that they would never consider doing on their own.
For example, take the quiet little housewife who shops at a particular department store each week or month, where she buys the odd item of clothing or whatever. She usually enjoys a quiet browse, stopping occasionally to buy something, and wouldnt think of getting into a confrontation with anyone.
But once a year this store has a sale. And there she is. Squashed up against the front door half and hour before store opening time, as part of a crowd of hundreds of (mostly) shrieking women, ready to burst in the moment the door opens, and prepared to engage in a literal tug-of-war with another customer if she thinks she has been beaten to a garment she wants to buy. Caught up in the contagion of the crowd, she undergoes a personality change, just to save $10.

Crowd panic is usually motivated by either fear or greed. Crowds are contagious. Internet companies in the 90's, that didnt turn a profit but where capitalised in the billions!!
Why do people do this? Logic tells you it is as clear as the nose on your face that the price of these stocks has to crash. Its a matter of when not if. And each time theres a 10% correction in the market, the "herd" sees this as a "buying opportunity", rather than the start of a bear market, and rushes back to buy all the "bargins"

OPne of these "corrections" of course, will turn into a nosedive, from which the market will never pull out. Then once the downward momentum gathers pace, everyone will panic the other way and sell. Why? Because everyone else is selling. And, just as most stocks are at present grossly overvalued, the time will come when tose same stocks will be sold way down below their intrinsic value, yet still nobody will want them. Why? Because the rest of the herd dosnt want them either!!

So what really drives financial markets? Its not economic fundamentals. Its not interest rates. Its not supply and demand. Its not position. Its not inflation. ITS CROWD BEHAVIOUR. The Herd Mentality

graham dyer.