This is a constant feature of radio financial reporting. In most instances, the report of the results is followed by a quick synopsis of the cause “as investors worried about…”, or the like. In many instances this is obvious, e.g. Nortel fails to meet earnings and the tech stocks all fall heavily. But in some instances it is far from obvious. In recent weeks the market did well, and this was reported to be in reaction to a series of speeches by central bankers assuring the country that the economy was sound. Was it?
My question is: are these merely guesses, or can the cause of a market fluctuation always be known with such certainty? It would seem to me that there might be any number of concealed reasons to move the market. Maybe it’s only the station(s) that I listen to that do this?
The Wall Street Journal, a respectable and interesting paper, runs the “why the market did what it did” recap. The online version runs it twice a day. I wondered for a long time how they managed to contact all the traders and find out why they did what they did…
Stephen Landsburg, author of The Armchair Economist** compares the market fluctation-explainations with horoscopes, with horoscopes considered slightly more useful.
That said, sometimes the cause is reasonably identifiable - changes to the prime, producer price index and consumer price index reports being the first that spring to mind. However, I would like to point out that this isn’t really useful - you can’t make money by, for instance, buying stocks the day that the fed announces a rate decrease and selling them the next. Well, some people can, but the vast majority lose money playing that game.
So, in short, they aren’t backed by research, the aren’t useful, they don’t predict anything, and no one checks to see if the information contained in them is right or wrong. They are best taken with a grain of salt, and treated as entertainment for the money-minded.
Food critics, Art critics, Movie critics, Stock Market critics. They all HAVE to say something about whatever it is they are critiquing. The good ones are right much of the time, but figuring out who is “good” can be painful.
In general, I agree with the above posts. The Wall St. Journal also has an interesting feature where they track the performances of professional stock pickers vs. monkeys throwing darts at a board of stock names. The monkeys usually win.
However, the market is not all chaos. In a broad sense, the market in general (meaning not including company specific issues) tries to predict the macro-economy in 9-12 months, and therein the business enviroment.
In a very broad sense, stock prices are determined by predictions by people, who in theory, know what they are talking about (i.e. analysts, economists, etc.). Whether they are correct or not, the prices of stocks rise and fall on their whims.
When a vital economic number comes out (like the PPI and CPI this week) that is substantially different than economists had predicted, the “old” valuation is no longer valued. This week, the PPI and CPI were very high, which needed to be priced into the market. Thus the 10-15% drop.
I was inspired to do so by the recent claims by some news agencies that the stock market is either surging or falling based on day-to-day reports about the war in Iraq. Now, the OP and the respondents addressed ‘normal’ circumstances, but is there any truth to claims that day-to-day news about the war could affect the stock market?
Of course the news affects the market. However, the news has an unpredictable effect on the market, except after the fact. After the fact, by comparing the news, and the result, you can accurately predict that the market went up or down because this or that did or did not happen. Fortunately for the professionals in the world of finance, many different views can be justified by this phenomenon.
As an expample, Tuesday, the WHO made its report on SARS research available on the Internet. During the day the value of several medical research companies doubled. Interestingly enough those particular companies had no association with virology, immunology, or SARS in any way. The one company actually involved in the research to make a vaccine for SARS did not experience any substantial change in value.
See? It’s all logical.
Economists have predicted nine of the last five major recessions.
I used to write derivative market recaps for Swiss Bank on Japan and HK for about 4 years. Quite well known at the time in certain circles. Used to be picked up by the IFR pretty much every week.
Anyhoo, usually it was obvious what was driving the market, and other times you made shit up. Being tied into the trading desks, you got a pretty good inside picture. Call 5 or 10 institutional clients, and at least could get a feel for the consensus. Many a time I started the “market reason.” Many times there would be something like a covered warrant expiring and the hedge being taken off which required selling a significant number of futures. Other commentators would then “explain” the market selloff to Kim Il Sung or some such crapola pulled out of their ass.
Also, you have to differentiate between retail buyers (suckers) and the institutional players (pros). Institutional guys usually know the news long before the suckers 'cause that is their job and they pay a lot of money to have real time information. So, they second guess the market and usually sell/buy to the suckers when the news makes the mainstream.
For example, the smart guys would have seen the SARS coming, known it was going to hit every ones econ forecasts, and sold early on. They will probably be buying back pretty soon if they haven’t covered a lot of their shorts already. Follow the herd and you’ll usually be caught like a deer in headlights.