I read an article today that said the downturn in the stock market was the result of the murder of a soldier in Canada. Huh? While I feel sorry for someone who gets killed in the line of duty, I would never think to call my broker and tell her to sell stock. What would that accomplish?
Are there really people who react to this kind of news by selling stock? Crazy things happen in the world every day that have little or not effect on the US economy or US Corporations, such as the murder of a soldier in Ottawa. What’s the logic, if you want to call it that, behind this kind of panic selling?
You don’t need a rational link between the events in Ottawa and an investment decision. All it takes is a sufficiently large number of people who believe that other people will, for whatever reason, be induced to sell shares because of that. And the reason why these other people may sell can well be that they, in turn, expect that yet other people sell. In this sense, market reactions can become a self-fulfilling prophecy.
So there are people who sit around watching the news, and when something happens that they think may cause the market to go down they sell their stock to avoid a loss. Even if the stock does go down usually it goes back up sooner or later.
Do they just sit on their money or do they buy the same stock a few weeks later at perhaps a higher price than when they sold it? It costs them money to constantly buy and sell stock. Don’t they get that?
Why don’t they just hold onto the stock and ride out these ups and downs until the company announces something that means the stock will go down and be down for a while? Wouldn’t that be a more reasonable time to bail out if they want to avoid a big loss?
It’s not just people in general, it’s the huge investment houses that are in control of your pensions, 401K and mutual funds. If one of them jumps the others do a double take and try to figure out whats up and if they should react. Pretty soon everyone is doing something. When enough of them react you get a movement. This goes on everyday, it’s what they do. The financial news talking heads generally look for a simple newsworthy explanation of a market movement, it doesn’t have to actually mean anything. If we actually knew 100% of the time why markets rise and fall it would most likely scare everybody shitless. Sometimes they can point to something like an assassination or war; other times they make up bullshit.
There is money to be made every time a stock goes up or down. There are many people/institutions who’s strategy is to guess where the stock is going every day, every hour, every second and take actions that will net them money. Take a look at what High Frequency Trading does and you’ll understand that no change is too small or to fleeting that you can’t make money from it.
Bolding mine. For “you” read automated trading houses gambling millions per microsecond. Not “you” like a SDMB guy or gal with a PC & an e-trade account.
It might be rational, if incorrect. Perhaps you believe the government will overreact in some way, spend money differently to counter a threat or step up security or start a war or have a 900 million dollar funeral or goodness knows what. Any of those would impact the financial markets. And as others have pointed out, if even a small percent of investors feel that way, their actions can set off more acctions.
Here’s the thing. If you’re a stock market analyst and someone asks you “why did the market just go up/down?”, you simply cannot say “Beats me, sometimes it just does things”. You have to come up with a reason, and you have to come up with that reason fast.
Which sometimes ends up with some pretty silly reasons being given for these things.
It is also possible that explanations for why the markets went up or down are after-the-fact rationalizations. It is not possible to falsify the premise “the markets went down because of the shootings in Canada”.
It is much of the basis for one of my favorite scams.
Pick a (large) group of stockholders. Divide them in half. To one group, send a letter saying “I can predict the market - stock X is going to go up in the next week”. To the other, send a letter saying “I can predict the market - stock X is going to go down in the next week”.
Whichever way the stock went, divide the group that got the correct prediction in half, and send each half another letter, one saying stock Y is going to go up, and the other a letter saying it will go down.
Repeat. After a certain number of iterations, you have a group convinced that you can predict the market, and you then contact them and sell them your services at a high premium.
I have no factual answer, but whenever I listen to market analysts talking about why stocks nudged one way or another, it feels like this. I rarely, if ever, hear anyone say that it’s just natural day-to-day market variation/random walk. Which is why I generally just don’t listen to day-to-day market talk.
Keep in mind that Al-Qaeda often carries out multiple attacks in different locations. The fact that a terrorist attack is taking place in Ottawa increases concern that one will soon take place at the NYSE. Also, governments often respond to these type of incidents by taking measures that impede travel and commerce. If Canada were to increase scrutiny at its border crossings and harbors it would affect many U.S. companies negatively, ditto for increased airport security that would result in cancelled/delayed flights, etc.
Generally, no one has any idea why the stock market does what it does, and it’s such a complicated system that its behavior probably defies a simple explanation anyway.
If a company issues an earnings report or updates their expected earnings, that’ll cause their stock to move in predictable ways. But pretty much any other explanation for behavior is just noise.
There are transaction costs for buying and selling stock, but for big institutional investors they are (expressed as a percentage of the amounts invested) nowhere near what you as a private individual pay when you call your broker. That’s why high-frequency trading is profitable. In addition to lower transaction costs for buying and selling shares themselves there are also other ways to get exposure to shares (i.e., being in a position where you can benefit or lose from share price fluctuations) besides simply buying and selling the shares themselves. The “contract for difference” market, for instance, was partially constructed to allow people to get exposure to shares without buying them and incurring the associated costs. Much of the derivatives market exists for that purpose.
Im calling the article bull, or the reporting of it by the OP as misleading(intentionally or not). One poor soldier being killed would likely have little effect on the market: media reports of a sustained attack on the Canadian Parliament would. For much of the time the market was down no-one really knew what had happened in Canada. Reports were coming in of attacks in three different locations, any of which may have meant multiple casualties.
I will try to find the article where I first saw it, but I saw the same thing later on the Yahoo Finance.
I agree that when the market moves dramatically either up or down they try to come with an explanation, which may or may not have anything to do with reality.
I guess I assumed that a large percentage of the holders of stock were people like me, but that’s clearly not the case. So this isn’t due to panic selling (or buying) by individual investors, it’s more likely large institutional investors, or day traders trying to make a buck. Whether they are trying to avoid losses, or just gaming the system doesn’t really matter. To a regular Joe like me this just shows how irrational and unpredictable the market really is… much like how gambling works.
I heard it described as watching someone walk upstairs playing with a yo-yo. The yo-yo spends a lot of time going up and down, but walking up the steps is what raises the altitude.