The Stock Market Fell Because...

July 04, 2022
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We human beings like living with a why. Meaning is a critical part of human flourishing.

Sometimes we can get carried away though.

Take the stock market for example. Financial media loves to generate reasons for why the stock market did whatever it did on a daily (and even minute-by-minute) basis. We saw this with the recent actions by the Federal Reserve and its impact on the equity market.

On May 4, the day of a Fed interest rate hike, the stock market went up with the S&P 500 having one of its biggest jumps since 2020. One May 4 headline read:

“Wall Street Closes with Sharp Gains after Fed’s Interest Rate Hike”1

The reporter wrote, “U.S. stocks ended sharply higher on Wednesday after the Federal Reserve delivered a widely expected interest-rate hike, and the S&P 500 recorded its biggest one-day percentage gain in nearly two years.”2

The very next day the Nasdaq dropped 5%, clocking in its worst performance since 2020.

A headline read:

“Stock market news live updates: Stocks slide in violent U-turn from prior session; Nasdaq drops 5%”3

The journalist wrote, “U.S. stocks sank Thursday, giving back gains after a rally on Wall Street on Wednesday, as traders continued to contemplate the Federal Reserve's latest monetary policy decision.” 4

Wait a minute… Are stocks rising or falling due to interest rates and the action of the Fed? We are up because we got what we expected, but we are down because now we are contemplating it? To be fair, this is a bit simplistic, but if you followed the news over those two days, one wonders.

Here is the problem, sometimes we just want something to talk about. Obviously, the actions of the Federal Reserve are going to influence the market. But trying to manufacture meaning from the market’s every move can get a bit ridiculous and likely should not influence day-to-day investment decisions over the long run.

Sometimes things take a bit to play out.

To paraphrase the acclaimed debt investor, Howard Marks, in his May memo: investors can shift any objective news according to their subjective mood.5 Optimists and pessimists can suit the exact same event according to their opposing purposes.

Neither you nor I are above doing this.

Something to keep in mind as you watch the news; and, maybe more importantly, as you watch yourself.

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Sources:

  1. https://www.reuters.com/business/futures-rise-earnings-reports-ahead-fed-decision-2022-05-04/
  2. Ibid.
  3. https://finance.yahoo.com/news/stock-market-news-live-updates-may-5-2022-221907800.html
  4. Ibid.
  5. “Bull Market Rhymes” (May 26, 2022). Accessed online: https://www.oaktreecapital.com/insights/memo/bull-market-rhymes