MoneyShow's Jim Jubak discusses the market's post-election decline, and explains why it is often a mistake to tie any market action to a specific event.
Beware of stock market gurus bearing explanations.
If you are not already cynical about pundits and opinions after the US election, I don’t know how you managed to tune this out. But I think you need to realize that as useless as the prognostications were in the Obama-Romney race, they are about as useless when it comes down to explaining why the market does this or that on a day-to-day basis.
Analysts and journalists are asked to do this. They are asked to go: Oh, OK, so the market went up today or down today and why. And they look around for events, and they say "Oh, well, this and that made the market move."
Well, no. This event happens to be coincident with the market’s move, but it is not causally related except in terms of time. So what we are doing right now is we are fishing around and looking for explanations, and so we get a day like we had on the day of the election—which was Tuesday, the 6th of November—and the market went up. It was like OK, so the market is doing what? Well the market is anticipating somebody’s victory in the election.
Well, no. The market went up and it happened to be Election Day. I didn’t mean the market was anticipating anything about the election. It might have had to do about optimism about Greece, or it might have had to do with the way that the mechanics of people putting on trades and taking off trades was working out.
The day after the election—November 7—we had a big drop in the Dow—about 2% or so as of midday—and again, the question was OK, so what is the cause of this? Well, obviously, it is caused by the election. The election is just over; Obama won, so it is a reaction to the Obama election.
It could be. It could be fear on Wall Street that an Obama victory means more partisan bickering, and therefore we are more likely to move the US over the fiscal cliff come January. Or it could be related to what is going on in Greece at the same time, where we had 80,000 people in the main square in Greece, and we had police using a water cannon and tear gas and stun guns and a few protesters using Molotov cocktails.
This was all while the Greek parliament was trying to vote on their austerity package. No austerity package, no Greek bailout. These things were all happening at the same time as the market fell. Does that mean they are the cause?
Well, I would probably say we don’t know, and I think it is important to say you don’t know and let things evolve, rather than going, "I know what’s going on. I have to react to it immediately."
There are times when the best thing you can do is say I don’t have enough knowledge to make really big market-related changes to my portfolio. In this case, if it is about Greece, we will have some better sense of that by November 12, when there is a big vote of Euro Finance Ministers. If it was about Greece, then we should have some reaction to that vote, and in fact, the market might reverse.
If it turns out that we get to the 12th and the market still continues its downward track, then we can say OK, maybe this is about the US fiscal cliff. In which case, we are looking about a longer-term trend. Maybe at that point, you want to think about rearranging your portfolio to take care of the fiscal cliff. I gave a few suggestions for that in a column not so long ago.
So I think at this point you wait and see rather than trying to figure out exactly what is causing the market, because really—in the short term—it is mostly undetermined and mostly noise.
Related Reading:
Why the Fiscal Cliff Is So Important
