There's No Reason Why Stocks Are Down Today

Sep. 22, 2011 1:26 PM ETSPY, DIA, QQQ85 Comments
Felix Salmon profile picture
Felix Salmon
59.63K Followers

There’s a lot of uncertainty in the global economy, and that’s the kind of thing which makes stocks volatile. This morning, we’re seeing that volatility express itself, with global stocks all falling and US stocks down about 2.5% from where they closed yesterday.

But let’s not kid ourselves that there’s any particular reason why global stocks are falling. And especially, let’s not try to invent some spurious reason for the fall, be it broad and inchoate (“global economy fears”) or weirdly specific (“Federal Reserve pessimism”).

It’s may or may not be helpful, here, to check out the price-and-volume chart of the S&P 500 over the past few days.

sp500.tiff

You see that little wobble in the mid-afternoon yesterday, before the high-volume sell-off at the end of the day? That was the immediate reaction to the release of the FOMC statement at 2:30pm. The big plunge, on unusually high volume, started about an hour later. And the big drop at the open today was much more notable in price terms than it was in volume terms.

It’s silly to think that the decline in stock-market prices was a rational reaction to the FOMC statement. If the FOMC is more pessimistic than the market expected, that’s normally a good sign for markets, since it implies that monetary policy will remain looser for longer. The market cares about the Fed because the Fed controls monetary policy. And so Fed forecasts are important because they help drive that policy. No one revised down their growth expectations as a result of the FOMC statement.

As a general rule, if you see “fears” or “pessimism” in a market-report headline, that’s code for “the market fell and we don’t know why”, or alternatively “the market is volatile and yet we feel the need to impose some spurious causality onto it”.

This article was written by

Felix Salmon profile picture
59.63K Followers
Felix Salmon is a senior editor at Fusion

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