Tuesday, January 20, 2009

Also sprach the market

Financial journalists must have telepathic powers. Otherwise, you'd never see articles like this:
Obama spending plan worries US markets
While a large fraction of the economics profession has jumped on-board the fiscal stimulus bandwagon, apparently some investors are less sanguine:
Sinking bond prices are "a reflection of the massive stimulus plan in effect and the likelihood that there is more coming down the road, and the concerns how we will pay for all of this," Kim Rupert, fixed income analyst at Action Economics, told CNN Money.
So there we go. Fiscal stimulus will be bad for the economy, says the market. Or so I thought, until I read this:
Stocks tumble on fresh worries about banks
According to this article:
"At this stage, markets in general and bank investors specifically are really looking to government as the way out," said Jack Ablin, chief investment officer at Harris Private Bank. "Certainly, of just about all of inaugurations that I can recall today's event probably has the not only the symbolic importance but really tangible importance to the stock market." (emphasis added)
So who's right? Financial markets are not monolithic entities, but the product of millions of individual decisions. They are affected by many factors and it's easy (but usually wrong) to construct an ex-post explanation of the day's events.

It seems unlikely that the stimulus plan had much to do with today's events in the market. Obama was sworn in today, but we've known for weeks that fiscal stimulus is coming fast. And it seems equally unlikely that financial markets are suddenly spooked by government debt, particularly with near-zero interest rates allowing the Treasury to borrow virtually for free.

If the market is up tomorrow, what will the headline be?

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