Let Me Explain To You What Really Moved The Market On Tuesday

When we see a large market move occur which surprises you, what do you do? The first thing you likely do is go on the internet to read the financial news so that you can “understand” what just happened.

And, what does the news present to you? Well, the news presents to you what the market did and what the “cause” of that move was based upon what hit the news wires that day. In other words, almost every analyst you read will correlate the news of the day to the market action.

But, it is clear that no one seems to have learned that correlation is not akin to causation. In fact, that is the major issue with this type of “analysis,” which I have addressed in the past.

And, what happens when there is no news relating to what occurred in the market? Well, you then get ridiculous headlines like the ones I have highlighted in the past:

“Stocks fall amid report that Deputy Attorney General Rod Rosenstein is resigning”

“Dow Gains 90 Points Because Objects In Motion Stay In Motion”

“Stocks higher as traders glued to Kavanaugh hearings”

In fact, if you searched far and wide, you would not find any reasonable reason to explain such huge swings for the market action we experienced on Tuesday.

So, I want to digress a bit, and present two quotes to you written by the same analyst, presented at different times of market action:

1. “...the fate of markets is inextricably intertwined with the ebb and flow of geopolitics.”

and

2. “...the competing macro headlines that bombarded traders all week were by and large irrelevant when it comes to explaining moves in U.S. equities.”

Amazingly, both these quotes were written by the same analyst. And, the operative question is: which one presents a more accurate picture of the relationship between geopolitics/news and the market?

Markets rally on good news, and markets rally on bad news. Markets fall on good news, and markets fall on bad news. So, this must mean that news events, including geopolitical ones, are “irrelevant when it comes to explaining moves in U.S. equities.” Now you understand which one is right.

Yet, this analyst and most others continue to present us with news and geopolitical events to try to explain moves in U.S. equities. Is any of this making sense to you? Because it certainly is not to me!

Interestingly, I saw a recent comment in an article that hit the nail on the head:

“the ability to explain what has just happened is interesting.....but if one can truly explain everything up to the moment, why is the future just a blur?”

This commenter highlighted the exact point I have been trying to make. While analysts attempt to explain what has occurred in the past based upon the news or events of the day, it has no bearing on what will happen in the future. For the intelligent person, you should conclude that even the explanations of what happened in the past must be irrelevant as well.

And, sometimes we cannot even find a “reasonable” explanation for what has just occurred, which is what we saw on Tuesday. As far as other examples, we still have no reason for the Flash Crash of years ago, nor is there a settled-upon reason for the crash of 1987.

To this end, Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, noted this regarding those engaged in “fundamental” analysis for predictive purposes at market turns:

financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?

Yet, despite this issue that we all know exists, what does most of what you read about the market present to you? Well, most of what is written is presented in two ways.

The first way attempts to explain what happened today or yesterday based upon the current events. Yet, as the commenter noted above, this has no predictive value as to what will happen tomorrow. The simple reason is that correlation is not akin to causation. In other words, no matter how well the reason is spun, it really is not the cause for the market move you experienced. If it were, then the market would not move if there were no news or geopolitical events.

So, while you may believe you understand the cause of the market move based upon the news of the day, that is simply not the case. All you are doing is fooling yourself, and fulfilling your desire to be able to control your environment. Yes, it is all directed by the human ego to believe we can control everything around us. And when we feel we understand the reason behind what occurs in the financial markets, it gives us a false sense of comfort and control.

In the second way of evaluating markets, attempts are made to analyze what occurred today, and linearly project that into the future. But, are financial markets linear in nature, or non-linear?

To these questions, Professor Douglas presents his rhetorical question: “[i]f the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?”

Are you starting to see what I am saying?

Much of what you read about market analysis is simply trying to explain what happened yesterday. And, more often than not, it has no bearing on what is going to happen in the market tomorrow. But, it certainly sounds good and makes us feel better and more in control.

But, the question you must ask yourself is: why do you continue to do the same thing when it proves itself to be useless in prognosticating the future?

An old aphorism says that insanity is doing the same thing over and over while expecting a different result. Does that make most of the market insane? Maybe.

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