April 19, 2019

Everyone Pretends to Understand the Market

“Here’s a dirty secret about the stock market: Much of the time, nobody has any earthly idea why stocks rise or fall on any given hour or day. The trouble is, many people are paid to explain such phenomena, so we often resort to that arcane analytical technique known as “guessing.”

Take the stock market’s collapse yesterday, including an 800-point loss on the Dow, one of the worst on record (it briefly swooned another 600 points today). What happened there? As Barry Ritholtz points out, everybody has answers that are seemingly obvious now – interest rates! trade wars! George Soros! – but if these were so obvious, then why did nobody see the collapse coming? The truth is, Barry writes, “the random walk thesis of how markets move is the best explanation we have.”

But pulling back from the day-to-day churn, Mohamed El-Erian points out there are longer-term trends and forces pushing markets around in fairly obvious ways (even if the precise moves aren’t always predictable). One of the biggest: The world has transitioned from one in which markets are fueled with an IV drip of liquidity from the Federal Reserve and other central banks to one in which fundamentals matter more. This is a healthy development in the long run, but often no fun in the short run, as we’re seeing lately.”

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