The Stock Market Surged Yesterday Because … Why?

I may be wrong, but it strikes me that the articles that appear in nearly every newspaper every day that describe a particular day’s stock-market movements are pretty much worthless.

They try to pin a cause or two on the effect that’s just been observed, when in fact the effect may have little relationship with the narrow causes being credited. Consider, for instance, this A.P. headline and news brief that appeared on Yahoo! News at about 2:30 p.m. yesterday:

“Stocks Surge to Start Q2”

Wall Street began the second quarter with a big rally Tuesday as investors rushed back into stocks amid optimism that the worst of the credit crisis has passed and that the economy is faring better than expected.

How does the A.P. really know that investors “rushed back into stocks” because they were optimistic that “the worst of the credit crisis had passed” and that the economy is “faring better than expected”?

The A.P. folks sure didn’t learn this from reading their own business headlines. Here are five A.P. headlines that appeared directly beneath the stock-surge news brief.

  • “Celent: 200,000 US Banking Jobs at Risk”
  • “Manufacturing, Construction Weaken”
  • “Ford, Toyota U.S. Sales Down in March”
  • “Congress Has Big Questions for Big Oil”
  • “U.B.S. Will Write Down $19 Billion”

Here are a couple of stock-market headlines I’d love to read one day:

“Stocks Surge, Reasons Unknown; May Be Nothing More Than the Random Fluctuation of a Complex System”

or:

“Stocks Dive: Three First-Movers Sold Hard and Then Everyone Else Inexplicably Followed”

But I could probably live to 150 and never see that happen.


Tom Freeman

Stephen's right: the media can't bear to just report events without showing us that they truly understand why these events have happened and what they really mean.

I know this is appalling vanity, but I wrote a spoof piece 'explaining' stock-market movements in London on the day in January that the Fed cut rates by 0.75%:

http://viva-freemania.blogspot.com/2008/01/value-of-your-investment-may-go-all.html

Might (or might not) be of interest.

David

Chipping in on 'Market Wizards':

JK Galbraith also pointed this out in his 'Short History of Financial Euphoria' - when the conventional wisdom is that stocks can only go up, when every ordaniry joe has bought in to the upward swing - that's when the market is maxed out and will drop.

The Dot Com bubble crashed shortly after the phenomenon of investment clubs featuring ordinary people were promoted widely through the media.

Same thing now - just after the boom in home improvement shows - the property and mortgage bubble bursts...

Madis

Headlines must sell, and they're meant for humans. Proper headlines just wouldn't sell. Don't you want to know why the hell markets moved? Or do you want to hear again and again that nobody really knows?

ARF

If you're asking about the US stock market, just look at the forex markets to see where most of the volatility comes from: overlay the following chart with the S&P500 over 5 days and carefully observe the correlations between the Euro-Yen rate and the stock market. http://finance.yahoo.com/charts#chart1:symbol=eurjpy=x;range=5d;compare=usdjpy=x+usdeur=x;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined (If you check this in the early mornings, US time, the time stamps confuse Yahoo Finance, look at it during the day.) Ken Fisher has spoken of the enormous correlation between American equities and the value of the Yen. It's all because of the Yen carry trade where people borrow Yen (and to a lesser extent, Swiss francs) at 1%, sell them to buy USD or Euros, buy western stocks/commodities that earn a higher rate of return, rinse and repeat.

Another helpful website is http://online.barrons.com/public/page/barrons_econoday.html which is Barron's calendar of major reports and figures releases, e.g., manufacturing numbers, housing numbers, CPI releases, auto sales reports, Fed meetings, etc.

Read more...

Oliver Townshend

I think the only day in the last year or so we can actually say was caused by something specific was when the French bank Societe Generale closed off their futures contracts, and even then they denied it had any effect.

Dougal

"Stocks Surge, Reasons Unknown; May Be Nothing More Than the Random Fluctuation of a Complex System"

Exactly. This should be the actual headline more often thatn not, but human nature just yearns for some reason, an explanation. Human emotion does not allow us to process randomness very well. That's why the financial media exists.

Surowiecki's "Fooled by Randomness" is a great book for anyone interested in the subject. So is my (shameless plug) paper "Investment Lessons from Google" which explores what Google's search engine, markets and collective wisdom means for personal investors.
http://www.indexuniverse.com/sections/research/11/3848-investment-lessons-from-google.html

jgruszynski

As Taleb describes in The Black Swan, humans are *compelled* to create stories about what ever events they see even when those events are provably random simply because that is how the human brain tries to make sense of the world and create advantageous predictions that on the savanna of ancient africa were good enough to give early humans a small survival advantage.

Today our environment is far more complex and rich in sensory input but our biology is no different than it was 30K years ago so it is now maladapted and prone to creating ridiculous stories about things which have no story to tell. It's like watching an empty analog tv channel (with "snow") and selling things in it - our pattern recognition neural nets will activate on almost anything that purely random.

There are many other "random" (stochastic) process time-series that this may be true for other than stock markets. Global warming may be one (or not); the fact that "global cooling" was the concern in the 1970s strongly arouses suspicions that the current frenzy could be like stock watchers ascribing reasons to random variations. The human inability to have "time constant" perception couples to forgetting or omitting history that doesn't fit a story to make me very suspicious. The dominant statistic distribution used today, the Gaussian, is predicated on independent events or independent selection of events from other distributions. This alone should give cause for concern about "story building" infinitesimal changes in stochastic series.

On the other hand, there could be systematic connections that link the events. The problem is that that will generally imply scale-free or nearly scale-free distributions for which conventional concepts like variance or averages either have no meaning or have very different meanings and especially outliers do not have exponentially lower probabilities of occurrence. In fact, at best, we may only be able to predict the statistics of the statistics of the distribution.

Read more...

Marc

The daily up/down of financial numbers, and the latest reasons for such, are called 'financial porn.'

Scott

A colleague used to work at a major financial paper. She tells me that as deadline was approaching each night, someone would often come into the newsroom and shout, "Why was the market up today?!" People would yell back answers, and that's how they decided. If not scientific, it's democratic.

Cory

Regarding the flucutations of a stock of a multi-billion dollar company: the value of the stock is related to future earnings of the company. One common way of determining the value of the future earnings is through a discounted cash flow (DCF) analysis. A problem with DCF is that in many cases the value is driven by estimates of the "terminal growth rate" of the earnings, or, the rate at which earnings will grow many years into the future. Small changes in these estimates (from 3% to 2.5%, for example) can cause a significant swing in the present value of the future cash flows. See #3 in this link: http://www.investopedia.com/articles/07/DCF_pitfalls.asp

That's not to say that the value SHOULD change that much in a given day, but that's one mechanism by which this swings occur.

deron

If papers started running headlines like that what would happen to, "The Onion."

There wouldn't be any profit in lampooning the banal absurdities we accept without question.

Rony Belinda

When a confidence game is being run, nothing is more important than confidence.....

WholeMealOfFood

There's an idea like this in The Halo Effect:

It's not very satisfying to say that today's stock market movement is explained by random forces. Tune in to CNBC and listen to the pundits as they watch the ticker, and you'll hear them explain, "The Dow is up slightly as investors gain confidence from rising factory orders," or, "The Dow is off by a percentage point as investors take profits," or, "The Dow is a bit higher as investors shrug off worries about the Fed's next move on interest rates." They have to say something. Maria Bartiromo can't exactly look into the camera and say that the Dow is down half a percent today because of random Brownian motion.

Lee

An economist was asked "What do you think the market will do?". To which he replied with a frank and honest answer "It will fluctuate".

This is the nature of markets and anyone participating in it could justify his/her position no matter what. The only problem is that the participant has a biased view and will be in denial when the market goes against this view. Also, reporters are not immune from making subjective reports to make trivial matters look so important. Everything is relative and mob mentality takes over when people act based on fear or greed.

Jason

This might have had something to do with it, as well. April Fools day can really getcha...

http://madconomist.com/market-rises-sharply-on-april-fools-joke

Chip

Wouldn't you get sick of seeing the same headlines with the proper reason?

"The stock market went down today because the stocks sold for less than they did yesterday."

"The stock market went up today because the stocks sold for more than they did yesterday."

Richard

There are many factors, sentiment and newsflow among them. Look out for stock market sayings - "buy on the rumour, sell on the news" being a good one to explain why stocks sometimes fall after companies issue good results. In recent markets, rises are often caused by traders covering short positions - that is, they sold stocks they didn't own when expecting then to fall, but have to buy those same stocks to cover their positions, thus pushing up the prices.

Crazy game...

james

Try to find an answer to "What is the value of a stock/company?". You'll be amazed at how many people think they know the answer with certainty, and how many of those certain answers contradict each other.

Heathcliffe Octopi

Dave Barry was all over this many years ago, with his imaginary newspaper quote (from memory): "Stocks plunged yesterday on news that Saturn has 8 moons rather than 7 as previously believed."

risma

Hear hear! I don't know how they manage to keep printing such things without looking like complete morons, but since it's just entertainment as opposed to news, I guess they get a pass.

@ #4 RobertSeattle -- I think it's because the market capitalization of a company isn't the same as the value of the company. Market cap is artificial in the sense that it values every share instantaneously at the same exact amount, which isn't reality. If you really wanted to value an entire company you would have to understand what a willing and able buyer would pay for the whole company. If you could somehow know that number all the time, it would certainly change, but not every fifteen minutes!