Post hoc ergo propter hoc?
Who is to say the stocks won't go up again next week? And is a 3% fall really that significant in the context of a market that has risen more than 60% in the past year?
"New Bank Rules Sink Stocks"
declares the headline in The Wall Street Journal, and who would dare question that august publication when it adds "Obama Proposal Would Restrict Risk-Taking by Biggest Firms as Battle Looms".
Well, here's one scrappy little contrarian who believes that
"China, Not Obama, Sinks Stocks"
This one appears in the ... The Wall Street Journal.
What's going on here?
Well firstly, it's worth pointing out that this little dance is not confined to The Journal, or to this particular situation.
In fact, in more than two decades reporting business news, I have found that the debate over why the market went up/down yesterday is among the most common conversations in the newsroom.
For a journalist, the inevitable first step in explaining market movement will involve a scramble to find causation... was there a notable corporate earnings report/a major policy speech from a politican or influential businessman/a release of economic data?
If so, find a linkage and file your copy.
But often, when the worst comes to the worst and even the most creative verbal gynmnastics and manipulation of logic won't deliver a plausible storyline, the journalist will have no option but to fall back on the old tried-and-trusted duo ...
- "The market fell on profit taking..."
- "The market rose on investor optimism over..." at which point the journalist will pluck out a favourite rosy-scenario rumour as explanation.
Note that the most important word in both those two sentences was the smallest - on.
The majority of intro paragraphs in a market wrap story will be constructed in the same way, such that they land squarely on the word on as a little verbal launchpad into the meat of the story, the explanation, the "news you can use".
Except, mostly, you can't use it.
These glibe explanations, the tying of disparate events into a single, interlinked narrative, are more often than not more misleading than enlightening.
Born of the journalist's need to fill space/time with content, and of the basic human need to make sense of often inexplicable events, these reports rarely take into account the broader context or prevailing trends.
And thus we end up with a daily diet of stories that confuse correlation with causation, and rely on the belief in the philosophy of "post hoc ergo propter hoc." (loosely translated: if it happened after the event, it must have been because of the event."
And so to the significance of President Obama's announcement. Surely it moved stocks, you say. Look, the Dow banking sector dropped 3% on the day... that's significant!
Well, up to a point, Lord Murdoch. Certainly there are decent stories to be written about the ultimate shape of new financial regulations, and how they might impact bank earnings in the long run. And certainly there will have been some people who, before the proposed regulation has even entered the debate stage, will have decided to dump all their banking stocks, thus causing some of the fall.
But still, we're talking about one day's trading here. Who is to say the stocks won't go up again next week? And is a 3% fall really that significant in the context of a market that has risen more than 60% in the past year? (Surely the better story here involves looking at how come the market has done so well despite such rotten economic circumstances? But I digress)
And what about the bigger picture?
In the (appropriately named) "Big Picture" blog, Barry Ritholtz, one of the most dependably sane financial commentators out there, points to at least one very relevant item. On the same day that banks tanked on Obama's bombshell,
the commodities sector got whacked 4.3%. China made a major announcement they were restricting bank lending to cool inflation and slow the economy.
So banks, and Obama, weren't even the biggest factor in the Dow's fall on the day.
Ritholz's whole post is an excellent analysis of the situation from an investor's point of view, and a bracing reminder that "content" and "value" are very different things.