The Dow: always an explanation

[Theophylact]

Kevin Drum comments,

DOW UP! DOW DOWN!....Earlier this morning I was griping about the kind of dumbo financial reporting that pretends there's a reason for every tiny change in the stock market. Some days it's "Dow Drops on Kazakhstan Potassium Worries," other days it's "Dow Drops After Dem Takeover of Congress." Both are about equally meaningful. But guess what? The Dow set a new record today! So how did CNN explain this peculiar state of affairs? Here's their subhead today:

Techs lead turnaround as investors move beyond possible Democratic control of Congress

Yes, you read that right. Not "Dow Moves Randomly for No Special Reason." Not "Dow Welcomes Democratic Victory." Not "Dow Higher on Hopes of Iraq Withdrawal."

Nope. The mind readers at CNN decided that in the space of just a few hours investors had both panicked and recovered over the dire threat to the economy posed by Nancy Pelosi. Crikey.

[Pexster]

Yes, Bingo had expressed concern yesterday morning about this. I think the DJIA was down 24 or so at the time. That would be about . . . let's see . . .

0.2%

I think.

[The Real Bingo]

And I don't think it was coincidence that it rallied when it was announced Rumsfeld was stepping down. It doesn't just go up and down for no reason. I guess it took a trip to the toilet for no reason in 2002.

[osprey4]

...proving only that when the fundamentals are good, investors don't care who's running the government.

My favorite analysis (by John Seater):

For the country, the election probably turned out just about as well as it could have. We probably will have a deadlocked government for two years, which means no more harm for a while.

Here, here!

[MTAtech]

What you are describing is the Random Walk Theory first discussed by Burton Malkiel in 1973. It's the theory that stocks move randomly in an unpredictable way.

I actually think stock (or index) movement is similar to local temperature. Local temperature changes in a predictable fashion throughout the year - temperature rises as we approach spring and summer and diminishes as we approach winter. However, day-to-day change is random.

Likewise, stock indexes will trend up as interest rates fall and rise as economic activity increases. However, from one day to the next it's random.

I think that the explaination: "For the country, the election probably turned out just about as well as it could have. We probably will have a deadlocked government for two years, which means no more harm for a while," is simplistic. The Congress and President only have one effect on the economy, fiscal policy - where the government spends our money and how much taxes we pay. Monetary policy is left to the Federal Reserve.

It's unknown what will happen with fiscal policy. If the Dems force a pull-out of Iraq, that's a 200 Billion dollar a year savings that won't have to be borrowed, thus lowering demand in the financial markets which then lower interest rates. Then there is the effect of raising the minimum wage; amending Medicare "D" will lower drug company profits while lowering the government's burden; then there's future tax policy, etc. All of this cannot be digested by stock holders yet.