When people talk about the ongoing tumult in the stock market, they typically blame investors’ lack of information. There’s the uncertainty about the future state of the economy. There’s the confusion about what the government will do next with its ever-changing bailout program. And there’s the mystery of what the mortgage-backed securities clogging bank balance sheets are really worth. Yet, even with all these lurking unknowns, investors have far more information today than ever before. Your ordinary day trader, if any of those still exist, enjoys far greater access to economic and market data than men like J. P. Morgan did when they were running Wall Street. But this information isn’t necessarily making investors, or the market, any smarter. In fact, what may be driving the market crazy of late is that it knows too much.
The problem isn’t so much the never-ending stream of surveys, studies, and statistics””retail sales, housing prices, consumer confidence, unemployment claims, and so on. These numbers, though of varying accuracy and usefulness, at least offer a picture of what’s happening in the economy””which is, in the long run, the fundamental driver of stock prices. The real problem is that investors are also deluged with another data stream; namely, all the trading information from the world’s many markets, which gives them a constant, noisy, and often misleading impression of what other investors are thinking.
Another wonderfully fact free article.
I recently heard on a radio program the founder of one of the older leading mutual fund companies say that the movement of the stock market is now based on speculation and not economic factors. I tend to agree.
Perhaps it is a combination of economic and other factors. The ‘other’ factors are tricky but explainable. Lets assume that fifty years ago there were predictable patterns in the stock market. People, and later computer programs got to work identifying those patterns. Companies and individuals that recognized the patterns made money but eventually many other people got on the band wagon.
Eventually enough money is chasing the patterns so that the patterns begin to change. The end result is that the market becomes more efficient but it also becomes noisier in some respects. The market becomes more sensitive to economic information derived from economic reports, interest rates and news reports but it also becomes less predictable.
The old practitioners don’t understand the math used to do this sort of thing. That is why investment firms hire “quants”.