The Real Reason Markets Swooned Yesterday
(Bloomberg View) -- In the 1927 book “Security Speculation - The Dazzling Adventure,” Laurence H. Sloan repeated the now famous anecdote 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.
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 Times reported, 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.
• The White House economic team is leaving: The New York Times reported that National Economic Council Chairman Gary Cohn was “disgusted” and “upset” by Trump’s comments on the events in Charlottesville. Soon after, an errant tweet that he had resigned (and deleted almost immediately) “spooked” Wall Street. The problem with this narrative is that even after it was debunked, the stock-market selloff accelerated. It is hard to see how imposing a narrative on an event after the fact, especially if it was based on an erroneous tweet, was an actual source of selling.
• Crowded VIX short trade: Of all the after-the-fact explanations, this seems to be the only one that was actually market-related. Selling short the VIX index, sometimes called the fear index, has been a money-maker all year. It began attracting more and more hot money, eventually becoming a crowded trade. Once too many people were on one side of the boat, Mr. Market exacted the comeuppance.
Like the tectonic plates under building pressure, we never know exactly when a slippage will occur that leads to a quake. The tendency to create a story line around an event after the fact is simply the way humans have evolved. It’s part of our wetware. We cannot escape it; we can only be aware of it.
As we saw yesterday, markets will fluctuate -- or as Sloan wrote of the stock market: “It did. It always has. Perhaps it always will. In the main, security prices are always and eternally going somewhere.”
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.