If you want to see what whiplash feels like, you don’t have to get rear-ended in a car crash or fall down a flight of stairs. Instead, you can just watch the stock market.
Let me explain. During the five-week period from Aug. 29 through Oct. 3, the four main market indicators — the Standard & Poor’s 500-stock index, the Dow industrials, the Nasdaq composite and the Wilshire 5000 — all hit their all-time highs. The market gods were showering money on investors.
Sure, interest rates were rising and there were signs of other problems. But optimism reigned. Stocks were going up and were gonna keep going up.
Until, suddenly, they weren’t. Soon after the Dow peaked on Oct. 3, stocks started falling and kept on falling for weeks.
The major reason cited for the decline was . . . rising interest rates. Rates had been rising during the run-up — but never mind. Suddenly, rising rates — especially rising long-term rates — were being seen as a huge problem.
Donald Trump running his mouth in mid-October, blaming the Federal Reserve’s increases in short-term rates for the market decline, didn’t help things any. (I’ll spare you the explanation of why the Fed raising short rates probably helps the stock market by putting downward pressure on long rates. For details, consult your local market guru.)
By the time the markets closed on Halloween, the scary October drop had wiped out stocks’ gains for the year. Many investors felt haunted, so to speak. Fear reigned.
Talk of a “correction” was everywhere. For those of you who don’t speak stockmarket-ese, a “correction” (more later on that) is a drop of 10 percent or more from a market peak. It’s a totally random measure, based on nothing scientific or financial.
Now, watch. According to data that Wilshire Associates assembled for me, all four major market indicators were hit by “corrections” in October. The peak-to-trough declines ranged from 10.1 percent for the Dow to 14.6 percent for the Nasdaq.
I don’t know about you, but as an English major who’s also a grammar crank, the way “correction” is used — or rather, misused — irritates me. It’s like hearing fingernails scraping on a blackboard. (If blackboards still exist.)
“Correction,” you see, is nothing more than a euphemism for “substantial price drop.” Market news in the latter part of October frequently included mentions of various markets being in or out of “correction” territory on a given day or at a given moment — as if that were important in and of itself.
Here’s why I’m so skeptical about the term. After a “correction” has occurred, stock prices are presumably correct, right? So answer me this: If at a given moment the Nasdaq composite is, say, 14 percent below its all-time high and in “correction” mode, does that mean that its current level is the correct one? If so, was the Nasdaq’s earlier higher price a mistake? Sure, those are rhetorical questions — but good ones.
“I personally don’t believe in these artificial ‘correction’-type milestones, but a lot of the market does,” Wilshire Managing Director Bob Waid says. “So part of this may be a self-fulfilling prophecy.”
Now, let’s look at what’s happened this month so far. Stocks have been rising since November started. Suddenly, “correction” talk has disappeared. Now, we’re looking at a post-correction “rally.” Which isn’t being called a “mistake.”
As of Friday’s market close, the four market indicators were up between 1.4 and 3.5 percent. A total reversal of October.
You’ve seen stories, of course, attributing Wednesday’s sharp market rise, which accounts for a substantial portion of the November increase, to the results of Tuesday’s midterm elections. But that doesn’t make much sense to me, given that the results — the Democrats taking control of the House, Republicans slightly expanding their margin in the Senate — were pretty much what was being predicted.
However, in a world in which people — especially people in and around Our Nation’s Capital — obsessed over the midterms for months, it’s natural to attribute everything to election results. To de-genderize the old Mark Twain line: To someone with a hammer, everything looks like a nail.
How do I explain why the markets are so whiplashy? I think — but can’t prove — that a lot of it has to do with the fact that most stock transactions these days consist not of people trading with each other, but with computers using algorithms to trade shares back and forth at ultrahigh speed.
As a result, when stocks go up, they tend to keep going up. And when they go down, they tend to keep going down.
For all I know, by the time you see this, the up-sharply-then-down-sharply-then-up-sharply-again market that we’ve seen over the past 10 weeks may be headed down again. Or be heading up at warp speed. Whiplash City, here we come.