The Real Reason Markets Swooned Yesterday
It’s the same one that explains why they are rising today and might fall the day after.
Bloomberg, August 18, 2017
In the 1927 book “Security Speculation – The Dazzling Adventure,” Laurence H. Sloan repeated the now famous anecdote 1 about J.P.Morgan’s view of the stock markets:
History has it that young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.
Fluctuate indeed.
That simple truism seems to been lost to some folks, who were taken aback by yesterday’s market decline. The Dow Jones Industrial Average fell 274 points, but that sounds worse than it is; in percentage terms the retreat amounted to 1.24 percent. The Standard & Poor’s 500 Index fell 38.1 points, or 1.54 percent; the Russell 2000 Index of small cap companies fell 1.78 percent (24.6 points) while the Nasdaq Composite Index had a 1.94 percent (123.2 point) fall.
As Bloomberg News noted, “Evidence is building that the market’s long stretch of tranquility is breaking. The S&P 500 swung at least 1 percent in three of the last six sessions after spending the previous three weeks without a move of more than 0.3 percent.”
The collective question investors are asking is “Why here and now?” It is tempting, and probably correct, to simply declare this the well-known random walk of markets. But rather than leave it at that, let us turn a critical eye to some of the explanations that were circulating.
Here they are from least convincing to most:
• All Donald Trump all the time has finally worn out people’s patience: I think we are all exhausted from living in this Trump-driven reality show, but I doubt that is why markets moved lower. Traders are happy to speculate about anything, regardless of merit. Let me remind you it was only a week ago that we were genuinely worried about escalating tensions with North Korea. If the market can ignore the possibility of nuclear Armageddon and still power higher, it is hard to believe the noise emanating from Washington was a source of concern.
• Terrorism: The first reports of the attack in Barcelona hit about noon New York time. But markets were already in decline and gold and treasury bonds were moving higher before the detailed reports that 13 had been killed. Does anyone believe a local attack, as horrific as it was, drove markets lower? It is hard to see that as a factor.
• Corporate America abandons the White House: This began Monday, when Kenneth Frazier, chairman and chief executive officer of Merck & Co., resigned from Trump’s manufacturing council. (Merck’s stock promptly rose.) For one of the most prominent black executives in America, the president’s response to the tragedy in Charlottesville, Virginia, was simply intolerable. Trump proceeded to attack Frazier for having a conscience, which started a cascade of other resignations. As the New York Timesreported, by Wednesday morning “many of the country’s most influential C.E.O.s joined a conference call, and, after some debate, a consensus emerged: The policy forum would be disbanded, delivering a blow to a president who came into office boasting of his close ties with business leaders.”
Was this really what drove markets lower? The president hasn’t put together much of a track record as a dealmaker or someone who can get legislation through Congress, even though the party that he ostensibly heads controls both houses of Congress and the White House. That he couldn’t manage a voluntary group of corporate CEOs, whose constituencies include customers, employees and institutional investors, shouldn’t have come as any surprise to investors.
Originally: The Real Reason Markets Swooned Yesterday
