Whenever we see a major market move, there are always a series of post hoc analyses, explanations and rationales.
They are never convincing to me. Why? Because the narratives tend to try to tell a story that gives us comfort, rather than determine what actually happened and why.
Consider yesterdays 244 point pop. The talking heads claimed it was either:
-Draghi finally doing something to save the Euro;
-The Fed’s open ended response to economic weakness;
-The market getting comfortable with the prospects of an Obama win;
-Markets had over-compensated for an earnings decline;
-Prospects of a huge China stimulus
-ADP data suggests that perhaps the economy is okay.
To each of the data points, I say bullocks!
There simply is nothing new in any one of those items that wasn’t a) well known and/or b) expected or c) easily deduced by simply looking at history.
What did cause the rally? I don’t know, and mostly, I don’t care. That is really the worng question for investors to be asking themselves. After the fact explanations are worthless, and Day -to-day action is primarily noise. (If you want to look at charts, try using weekly data instead. More signal, less noise).
However, since you have already read this far, and are mostly unsatisfied with my explanation why all the other explanations are wrong, let me point you to one very interesting factor: Underperformance.
In yesterday morning’s reads, I included the chart below from the WSJ. (PM reads had a different chart from the same article). The piece, titled More Gains, Even More Pain: Summer Rally Puts the Hurt on Defensive Hedge- and Mutual-Fund Managers showed just how far behind — and therefor under-invested in equities — these pros must be.
Stock oriented hedge funds are charging 2% + 20% of the profits for their YTD returns of under 3%. Mutual funds that focus on large cap stocks are up YTD less than 7%. Oh, and those of you who index are up YTD 13%.
If you want an explanation as to what is driving stock prices, that is as good as any . . .
Summer Rally Puts the Hurt on Defensive Hedge- and Mutual-Fund Managers
Source: WSJ
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