One of the underlying principles of much of the daily news coverage of financial markets is that every effect must have a clear and rational cause. The yield on U.S. Treasury securities is plummeting — the all-wise, all-knowing bond market is giving us a message about deflation that lies ahead. U.S. stocks are tanking — investors are selling to protect themselves against difficult times the market sees ahead.
But then you look at what happened this past week, and you have to laugh at how nonsensical much of this coverage is, and how absurd it is to ascribe rational reasons for sharp day-to-day changes in stock prices or Treasury yields.
Stocks cratered on Monday and Tuesday, falling a total of about 2.5 percent — a substantial drop over such a brief period, decreasing the value of U.S. stocks by hundreds of billions of dollars. Meanwhile, the yield on the 10-year Treasury note, the most important single Treasury security, fell below the psychologically significant (see? I can sling jargon, too) 2 percent barrier to 1.96 percent, its lowest yield in years. Various experts — or as I call them, “experts”— held forth on the significance of these events.
And then what happened? Stocks headed back up, and the 10-year Treasury yield broke back above 2 percent.
Here’s my favorite set of numbers, from the Wilshire 5000 Index, which covers the entire U.S. stock market. For the four-day period we’re discussing, the 5K, as it’s known, was a total wash. According to numbers I got from Wilshire Associates, the value of U.S. stocks fell by $450 billion on Monday and $250 billion on Tuesday, for a two-day, $700 billion drop. On Wednesday, the market rose by $275 billion and on Thursday, by $425 billion. That $700 billion gain totally offset the Monday-Tuesday decline.
So whatever rational reason market “experts” offered for the sharp Monday and Tuesday drops had apparently been totally reversed by Wednesday. I mean, give me a break.
Now, to the 10-year Treasury. According to the Treasury’s Web site, the 10-year’s yield, whose yield was 2.04 percent on Monday, broke the 2 percent barrier on Tuesday and Wednesday, ending at 1.96 percent. On Thursday, it was back to 2.03 percent. These are sharp moves for a major indicator that, as you can see, made a roller-coaster trip to end up where it started, pretty much the way that stocks did.
So if you believe that stock prices and Treasury yields dropped for rational reasons, you have to believe that a whole new set of rational reasons accounted for the subsequent rises in stock prices and Treasury yields.
So what was going on? Was the decline in stock prices caused by “profit takers” — a Wall Street euphemism for “sellers” — locking in gains from last year’s strong market? Was the increase caused by “bargain-hunting cash-laden investors” swooping in to take advantage of the decline caused by the “profit takers”?
In a word, “no.” How do I know this? Because, for starters, most U.S. stock trading is by computers working off of formulas, not by human investors poring over prices and trading patterns seeking stocks that are trading below or above their real, fundamental value. Over any sort of short-term period, prices are moved by momentum, trading formulas, computers dealing with each other, fear and other market dynamics that I don’t pretend to understand. To a large extent, stocks were going down Monday and Tuesday because they were going down, and were going up Wednesday and Thursday because they were going up.
The same thing is true of the bond market, which gets a lot less publicity than the stock market — you know about the Dow and S&P 500, but when’s the last time you heard anyone discuss Barclays bond indices with a general audience? — but is at least as important as stocks are.
Yes, I know that journalism is supposed to offer reasons for everything — and that we business journalists are supposed to offer up wisdom on a daily or hourly or minute-by-minute basis. So what was the rational reason for U.S. stocks making a four-day, $1.4 trillion round trip and ending up where they started? Beats me. Beats the folks at Wilshire, whom I felt obliged to ask. Beats pretty much anybody, I think.
I would love to tell you the great inside story of what happened on the first four trading days of last week, plus what happened Friday. But I can’t. And I don’t think that anyone can.
In the long run, however you choose to define it, markets tend to be rational, and to have a message for us. But in the short run, markets generally offer us noise, not wisdom. Try not to confuse the two.
Sloan is Fortune magazine’s senior editor at large.