Photo: Spencer Platt/Getty Images
At an abstract level, I find it weird how volatile the stock market is on a day-to-day basis.
The markets had a terrible day yesterday, and stock prices fell by about 3 percent — which means, in theory, the present value of all the future profits of American companies was 3 percent lower as of yesterday afternoon than it was the day before. Does that make sense? Was the world really that much different on Tuesday afternoon than it was on Monday?
Whenever a drop like this happens, there is pressure on analysts and journalists to explain why the stock market fell so much, even if the reason isn’t entirely clear. Back in 2014, I wrote about the phrase “profit taking,” which is a term people on business television sometimes use to explain inexplicable stock drops. (My old boss Henry Blodget, a financial television veteran, notes that when stocks are up for reasons you can’t identify, you can say investors were engaged in “bargain hunting.”) But in Tuesday’s case, there are two obvious candidates for the culprit behind the drop that have been featured in today’s market news stories.
One was President Trump’s declaration on Twitter that he is a “Tariff Man,” which may have undermined the markets’ confidence in his claim that he reached a tariff-averting deal with Chinese president Xi Jinping at the G-20 conference last weekend. Stocks had reacted positively to that news on Monday.
But Trump sent that tweet at 10:03 a.m., and the really sharp drop in stock prices didn’t happen until the noon hour. Markets should be able to incorporate a news event like a presidential tweet into prices immediately — not every trader needs to be focused on Trump’s tweets at all times for new information in those tweets to make its way into prices — so the two-hour lag undermines this theory.
The other factor seen as driving stocks down is a broad worry about global economic growth. But many of the drivers cited here are circular: oil prices are down; the gap between short- and long-term bond yields is down and in some cases negative; transportation stocks, which are more sensitive to recessions, fell especially hard.
Like the broad fall in the stock market, these trends all reflect changes in market expectations about the economy, rather than changes in the economy itself. They do not tell us why market participants have changed their mind about prospects for growth so suddenly.
Even if the markets weren’t reacting to the “Tariff Man” tweet itself, a gradual realization that the China “deal” was less of a deal than Trump made it out to be — due to comments from administration officials and apparent confusion on the part of the Chinese about Trump’s public statements — probably was one of the drivers of reduced market expectations for economic growth on Tuesday, inasmuch as trade wars are not good and easy to win but negative for American and foreign company profits.
But even here, market participants should know by now that Trump’s claims about deals and breakthroughs are not reliable. It seems to me the market probably should not have been up so much on the China news on Monday nor down so much on its evaporation on Tuesday. But then, if I were able to reliably assess when the stock market has deviated from “fair value,” I would be relaxing on my yacht instead of writing this column.
As is custom, the market is closed today for the funeral of President George H.W. Bush. I do not know what will happen to stock prices when the market opens on Thursday.