April 19, 2019

Black Wednesday Postmortem

“What is to blame for the over 800-point plunge in the Dow Jones Industrial Average and the 4-percent drop for Nasdaq last Wednesday? The short answer is, nobody knows.

However, the Fed’s interest hikes and the unsettling trade tension between U.S. and other countries certainly received the loudest credit. But just because these were the two loudest answers, does that mean they are the most accurate?

To answer this question, let’s look into the fundamental principles under which the stock market operates. One defining principle of the stock market is that it responds to unexpected news, not stale news.

The Fed announced the most recent interest rate increase on Sep. 25 and made it evident that a fourth hike was to come at the end of 2018.

It is hard, if not impossible, to imagine that U.S. capital markets, which take as little as seven milliseconds to incorporate Federal Open Market Committee (FOMC) meeting news into futures prices, really need three weeks to react adversely to the Fed’s past moves.”

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