​The News and The Market, Part 1 (of 2)

By Brad Thomason, CPA
 
 
Many of yesterday’s financial headlines were built on a basic framework that went something like this:  Fed Chairman Powell Makes Positive Comments and Dow Surges More Than 700 Points.
 
I find headlines of this type to be troublesome, understandable and amusing all at the same time.
 
At the level of factual accuracy, you can’t fault it.  Yet that’s not the whole story.  It would be equally accurate, as a matter of fact, if the headline had been Brad Thomason Pours Cup of Coffee, Then Dow Surges by More Than 700 Points.
 
Now, I’m not suggesting that my morning beverage routine moves markets, nor am I discounting the opposite with respect to the chairman of the Federal Reserve.  Merely pointing out that such simple statements, even if technically correct, don’t ever tell the full story, and often imply a level of causation that is simply not there.  The following paragraph will represent a more nuanced example of what the headline should have said, if more complete assessment had been the goal.
 
The Fed chairman made some comments this morning which market participants received favorably.  This set the initial tone for several hours of trading activity in which prices rose and stayed there.  Also on the minds’ of traders, a new jobs report which showed better than expected results.  That all said, today’s rally follows a down day yesterday, and it was reasonable to expect some snap back in today’s session irrespective of new news.  Finally, the overall behavior of the market today was essentially the same as it has been for the last three week, with prices rambling around in spirited fashion between the 22,000 and 23,500 levels on the Dow.  In terms of changes to the established ranges, nothing really happened.
 
The reason that my paragraph would never be workable as a headline is obvious.  But it highlights the inherent flaw in news distributed by way of headline.  Because headlines have to be short and clean and simple, they inadvertently give the impressions sometimes that A caused B, end of story. 
 
Compounding the problem, when you hear TV and radio folks talk about it later in the day and they are asked what happened, they usually lead with a repeating of the headline.  Instead of clearing up the confusion, they reinforce it. 
 
Unless you are really on your toes you can get lulled into forgetting all of this, with the effect that you come to accept that a single data point was directly responsible for an entire day of trading activity.  It wasn’t.  But less informed consumers of news don’t realize that and come away with an incorrect understanding of how markets work.  And like I said, even those of us who do know better can forget.
 
Jerome Powell did not reach the end of his comments and the Dow was 700 points higher in the next minute.  Yet the basic headline sort of implied that’s what happened. 
 
Anyway, you get the point.  Just do yourself a favor anytime you are reading headlines about what caused the day’s market result:  remember that you get the point.
 
Next time, I’ll discuss two other aspects of the news which are worth remembering.