KEVIN DRUM writes : The New York Times reports today that the stock market is up. Here's the story they invented to explain it: (a) there's a widespread belief that the global economy is tanking, thus (b) reducing the demand for oil and (c) driving down oil prices. Wall Street, (d) seeing plummeting oil prices, (e) is elated and (f) drives stock prices up. There are two basic possibilities here: (a) this explanation has been created out of whole cloth or (b) Wall Street investors are idiots. Or both. For now, I'm going with (a). Now, there is always an element of shallow post hoc ergo propter hoc reasoning in news stories discussing market movements. This does come across as a little odd, however. It's reminiscent of instances when markets rise on expectations of an interest rate cut. The greater the odds of a cut, the worse off the economy (one presumes), so why should markets react positively? If we must assume that price movements are not primarily a function of random volatility, then a better explanation should take into account the role of expectations. Markets might rise on a rate cut, because the rate cut signals a continued commitment to full employment as a goal of the central bank (and expectations that future cuts may come more readily). And investors may have interpreted falling oil prices as indicating that future supply might not be as tight as expected. Or we can recall Tyler Cowen's comment from yesterday: ...Any new ...
Anytime
