There is a certain school of thought — and I use that word loosely — that seemingly tries to tie each twitch of the market, every noisy jag up or down — to some broader issue. Partisan politics, economics, technology, and of course, presidential elections becomes fodder for this
school of thought rationalization. Flip on FinTV at random, and you will often see someone explaining the most recent market moves via whatever their favorite pet issue of the moment is. By pure coincidence, the market is doing well because their issue is improving, or not coincidentally, doing poorly due to some entity’s failure to recognize the significance of their peeve, and taking action NOW!, thereby tanking the Dow.
The area is rife with rationalization, bad analyses and cognitive errors. I studiously try my best to avoid it as a form of commentary, and it certainly has no place in any investment thesis. It is more often just a revealing Rorschach Inkbot Tests.
That said, I mentioned something yesterday which perhaps I could expand upon further: The strong September rally as perhaps a response to developments in Syria, or at the Fed, or elsewhere. At the risk of my own confirmation bias, I want to explore some explanations as to what might be going on.
Consider this an exercise in rationalization:
• Syria: The war weary American public has no appetite for another Middle Eastern adventure. Kerry’s gaffe — an off the cuff comment about disarming Syria’s chemical weapons — may have accidentally averted war. Is this rally a peace dividend? Is the market rallying on the possibility that the American consumer will not see sentiment crushed, that the Treasury will not have to spend another few 100 billion dollars half way around the world, that we won’t have another 50,000 wounded warriors returning home to a less productive lifetime of medical care and cost?
• Federal Reserve Chair: I refused to vote for Obama this election because of his relationship with Larry Summers (and to a lesser degree, Tim Geithner). His economic naiveté is the only explanation I could think of for Summers as Fed Cheif. But key Democratic Senators are not enthused, with pockets of opposition developed. My favorite explanation/rationalization/confirmation bias/wishful thinking is that the market is starting to discount the increasing liklihood that it will not be Summers. It may not be Yellen, but so long as its not Summers, both the equity NAD the bond markets are pleased.
• Profits: Is it possible that the profit picture is not nearly as gloomy as the doomsters have portrayed it? After 10 consecutive quarters of forecasting the imminent collapse of peak profits, have they seen their credibility dinged up a bit?
As I so often say, I don’t know why the market does what it does. Most of the day to day action is far too noisy and driven by way too many inputs to be seriously explained by any one thing.
And while we know markets act as discounting mechanisms, often imperfectly, subject to the extremes of human emotions and cognitive errors, there are inputs that move the needle.
But despite these issues, markets often gets the broad strokes right. So we have a market up everyday in September (ending today? next week?) and up huge this week — and still disliked.
I wonder what the September rally actually means . . .
UPDATE: 9/12/13 2:00pm
Some interesting news regarding Summers:
Summers Faces Key ‘No’ Votes if Picked for Fed
Three Senate Democrats Oppose Bid, Setting Stage for Razor-Thin Vote
Markets Are Rorschach Inkbot Tests (March 2nd, 2009)