There’s no reason why stocks are down today

By Felix Salmon
September 22, 2011

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.


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 kind of thing matters — because when news organizations run enormous headlines about intraday movements in the stock market, that’s likely to panic the population as a whole. They think that they should care about such things because if it wasn’t important, the media wouldn’t be shouting about it so loudly. And they internalize other fallacious bits of journalistic laziness as well: like the idea that the direction of the stock market is a good proxy for the future health of the economy, or the idea that rising stocks are always a good thing and falling stocks are always a bad thing.

Or, most invidiously, the idea that the most interesting and important time period when looking at the stock market is one day. The single most reported statistic with regard to the stock market is where it closed, today, compared to where it closed yesterday. It’s an utterly random and pointless number, but because the media treats it with such reverence, the public inevitably gets the impression that it matters.

Here’s a more useful stock market chart, for the vast majority of people for whom the stock market only matters as a long-term investment:


I’m not going to try to read any great narrative into this chart. But if you want to explain stocks to the broad population, this is the sort of thing you should be showing them. Rather than useless and irrelevant news about what happened to stock prices this morning.


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Usually, I agree. But today I think that’s guano. China’s PMI release last night was below 50 for the second consecutive month, and Germany’s tumbled, too. Comments from Alpha Natural Resources yesterday indicated that export demand for metallurgical coal (for steel making) was softening from it’s earlier forecasts. I think we are seeing very real, very new fears about the level of global economic activity.

Posted by MitchW | Report as abusive

I think the decline in equities is a response to the breakup of REM. Most of these traders were frat boys in the late 80′s and early 90′s, and the breakup is emotionally devastating for them.

Makes as much sense as the other explanations usually offered by the likes of Bloomberg (or Reuters).

Posted by mort_fin | Report as abusive

German PMI 50.0 vs 50.2 expected.
Hold the presses!

I spoke over lunch to a CEO who explained that his (very low-income) customers see the media making a hoo-haa about the macro crisis and hence get depressed and tighten their belts accordingly, even though they are many months away from their household income actually feeling any impact from a Greek default/bail-out.

The recession becomes a self-fulfilling prophecy and nobody benefits.

Sure it was a relatively big move today and people like Mitchy and the media seek to explain it.

But Felix is right – unless you are a day trader or committed momentum trader then daily moves are wholly irrelevant.

Posted by TinyTim1 | Report as abusive

While I generally agree that assigning a single reason to large daily market moves is a foolish exercise, I think the headline and gist of this post goes too far in the other direction. And I think limiting the scope of the article to the stock market alone makes it easier to call today’s drop noise from a longer term perspective.

The Fed made a subtle but important change in how their assessment of downside risks to the economy, and simultaneously delivered the (modest) additional monetary policy support that the consensus expected. The net result is disappointment in the Fed that increasing sees economic weakness ahead but is approaching the limits of what it can do. To be sure, this was not the only data point and other economic news matters as well.

The short version is that there might be no single reason for the decline, and the reasons may not be relevant to all market participants. But to claim there is no reason at all is just as false as pointing to a single over-simplified or randomly selected reason du jour.

Posted by PForbes | Report as abusive

Yeah, no offense, but I’m looking at the second graph and thinking “Huh, the stock market has essentially gone nowhere since about 1997.”

Posted by jfruh | Report as abusive

Hm, let’s see
Story #1: Bush came in to office, cut taxes, market stagnant ever since then
Story #2: Distract the masses with stories of what happened overnight in Japan or Germany

now you know

Posted by johnhhaskell | Report as abusive

“Here’s a more useful stock market chart, for the vast majority of people for whom the stock market only matters as a long-term investment:”

Ummm…. Felix? You’re looking the wrong direction. What matters to the majority of people is what the stock market will do over the NEXT 30-50 years, not the PAST 30-50 years. They really shouldn’t be looking at historical results at all, unless there is specific reason to believe that the future will reflect the recent past.

Posted by TFF | Report as abusive

I see big bubble one, big bubble two, and big bubble three.

Posted by GRRR | Report as abusive

TFF is invited to provide a chart of the stock market over the next 50 years.

I so rarely completely agree with every major point in one of Felix’s posts that I feel the need to say that I completely agree with every major point in this post.

(I do think it was not unreasonable to have hoped for more from the Fed, and to be disappointed, as Sumner of course is, that they aren’t doing more. Note that TIPS are down today as bonds soar; inflation expectations are not doing what stimulative policy should cause them to do. The move in the past day, though, is less than 5%, which, on the final graph, is a blip.)

Posted by dWj | Report as abusive

“TFF is invited to provide a chart of the stock market over the next 50 years.”

Wish I could! This is a situation in which what is helpful is not possible, and what is possible is not particularly helpful.

My own analysis tends to focus on revenues, profitability, and cash flows. I don’t consciously incorporate historical stock charts.

“I do think it was not unreasonable to have hoped for more from the Fed, and to be disappointed, as Sumner of course is, that they aren’t doing more.”

Agreed. Still, anything the Fed might do would simply be trading one devil for another. Don’t see any magical way to make everything right. (And clearly neither does the Fed.)

Posted by TFF | Report as abusive

Dunno, seems to me money is pouring out of equities and into US Treasuries (with the yield down 16points(!) on 10yrs)… wouldn’t that sudden moving of money cause a big sell-off? So there was a delay after the FED announcement, then investors made their play.

Posted by CDN_Rebel | Report as abusive

I think there is a simple reason for a broad-based sell-off with high correlations like today’s.

If I were the headline writer I’d say something like “Market participants collectively decided to require a higher rate of return on risk assets today than they did yesterday”. And if I were speculating about causes, I’d point to the Fed’s statement new emphasis on downside risks to the economy, which no doubt took a bit more than an hour to sink in with longer term investors. Evidently more of them were shifting out of equities than into them today. Asset prices are lower because demand fell. Easy.

Posted by loudnotes | Report as abusive

The long term chart looks great for someone like me who started investing in the 1980′s, but for someone younger, who started investing in 2000, it is not that great.

Posted by wwd | Report as abusive

Wow your last chart shows no growth in stocks whatsoever for the past, what 12 years? Just who are you trying to convince with this analysis here? And, while you are showing this, why not plot the value of stocks in, say gold and lets have a look at that slope?

Posted by ex_VRWC | Report as abusive

The author is absolutely right, look at the big graph. But don’t go back too far (i.e., about 20-30 years before 1975, when this graph begins), or you’ll clearly see the uptick that began in the early 80′s and, even more, the mid 90′s. Unfortunately, the uptick was largely fueled by debt, which the real world is trying to unwind, and which the Fed and other central planners are desperately trying to prevent, as they try to re-inflate the debt bubble. They won’t succeed this time. The “big picture” chart also reveals the creation of a massive “head and shoulders” since about 1995. By all means, as the author recommends, look at the big graph, the pretty one!

Posted by ElSyd | Report as abusive

One fact to keep in mind is that probably 75% of all trading nowadays is done by either computer programs or by day traders. This increases volatility tremendously because computer programs and day traders both have a very short-term, momentum-based focus.

These days trading volumes are in the 4-5 billion shares per day range. Go back ten years, during the height of the tech bubble, and trading volume was around 1 billion shares per day.

Now ask yourself who is doing all that extra trading? Hint…it’s not individual investors responding to items in the news. It’s computers and day traders whose time horizon is minutes or seconds…and who couldn’t care less about the long-term macroeconomic outlook.

If the government was smart, it would raise capital gains rates on all trades held less than a day to 90%, all trades held less than a week to 70%, and all trades held less than a month to 50% in an effort to reduce this type of market-distorting micro-trading.

Posted by mfw13 | Report as abusive

Dude, game is over. System corrupted. Reboot.

Posted by circusmaestro | Report as abusive

I think Barry Ritholtz is on the right track: -end-of-the-bernanke-put/

But Bernanke isn’t the only seller of government puts. Susskind’s new book–at least one excerpt from it posted by Brad DeLong–indicates that Tim Geithner also writes them: tigroup-resolution-romer-summers-vs-geit hner-emmanuel.html

To wit: “Geithner felt the duo [of Summers & Christina Romer] accentuated the financial crisis and actually ‘fed some of the pressure. They were perceived by the market as indulging in a lot of loose talk about haircuts [to investors holding debt in the banks] and that was very damaging to the markets.’ ”

(Remember: If you’re a government official in the US or Europe, the outcome to avoid at all costs is a bondholder haircut.)

Moody’s has (finally) realized that Dodd-Frank makes bailouts less likely. The Tea Party’s influence has grown enormously since the Santelli rant of Feb 09, as evidenced by the recent GOP letter telling Bernanke to cease & desist from QE3.

In sum, XLF is trading around the same levels it touched in Nov 08 — on its way lower, then & now.

Posted by dedalus | Report as abusive

“The long term chart looks great for someone like me who started investing in the 1980′s, but for someone younger, who started investing in 2000, it is not that great.”

I think you have it backwards… A typical investor who began saving in 1980 would have likely contributed more between 1995-2010 than between 1980-1995. Those early contributions were good for ~7% annual growth. But the later contributions have seen (on average) little or no growth.

In contrast, if you began investing in 2000 then you’ve had relatively little money riding through the bumps of the last decade. The key to your retirement success will be the market performance between 2015 and 2030, a period that (guessing) seems likely to be pretty good.

Posted by TFF | Report as abusive

Speaking as the guy who put the S&P 500 at your fingertips, today’s market action would best be described as a “noise event”, where things other that the fundamental driver of stock prices (changes in the expected future growth rate of dividends per share) are affecting stock prices.

Today’s market action is a direct result of a sudden change in expectations for what the Fed will do. Before today, investors largely expected the Fed would take stronger action to offset the potential for deflationary or near-deflationary economic conditions.

They didn’t, so the potential for deflationary or near-deflationary conditions are being factored into stock prices. Just as they were in the period between QE 1.0 and QE 2.0 in 2010.

Finally, note the chart in the top right corner of the third link – it’s a far more useful depiction of stock prices over time.

Posted by politicalcalcs | Report as abusive

Arghhh! Here are the links omitted from my earlier comment:

1. The S&P 500 at Your Fingertips:

2. New Deflationary Expectations Taking Hold?: ttp://

3. Completing the Loop, Take 2:

Posted by politicalcalcs | Report as abusive

Clearly the damage has done to our economy with his massive corrupt wasted spending, even more massive debt, Solyndra’s, massive UNEMPLOYMENT, and now ‘Son of Stimulous” and his war against American business is coming home to roost! If only Obama had listened and run up such nation killing debt, and put so many people out of work with his extreme left wing policies. He should announce now that he is asking for the repeal of Obamacare. That one sane act could show that the U.S. is serious about getting the debt under control and moving to economic sanity! Obama won’t do it. He’ll take us all down with him!

Posted by valwayne | Report as abusive

Amazing to have so many intelligent posts from such intelligent posters and nobody mentions the characterisation of the world economy by Robert Zoellick of the World Bank as being in ‘a dangerous zone’ which comes soon after warnings from Christine Lagarde of the IMF that the world economy was entering a dangerous place.

Such things do spook investors, but seem to be missed in the US media. 843

I suspect there’s also concern about Operation Twist not being as effective at boosting growth as QE1 and QE2 were.

Posted by FifthDecade | Report as abusive

I wonder if valwayne is standing on a $300m “Bridge to Nowhere” eating Pork Bellies when he complains about corruption in US politics?

As for a war on US business, it’s US businesses that have moved US jobs to China for the last ten years or more, so maybe Obama is just standing up for the US workers that voted for him?

Posted by FifthDecade | Report as abusive

Good point. The long-term chart shows a key point that the stock market has not generated a positive return for about a decade, since the peak around 2000.

This is why it is critical that folks own stocks than pay a nice dividend. Examples are AEP, D, RDS-B, MCD, KMB, LLY, etc.

Posted by Farcaster | Report as abusive