The conventional wisdom among economists is that capitalism is rational, because people act in their own best interest. However, among investors, there is an old adage that the stock market can be irrational and stay irrational longer than you can stay solvent. The market was irrational yesterday and today.
In the short run, the stock market is a contest between expectations and results. The expectation of Wall Street was that the Fed would, sooner or later, have to begin another round of quantitative easing (QE) to jump-start the slow economic recovery. It is also good for the stock market, because it drives down borrowing costs and drives up liquidity which usually finds its way into the stock market.
Yesterday, minutes of the last Federal Open Market Committee (FOMC) were released. It showed scant discussion of any future QE. In other words, Wall Street was disappointed and sold off.
But, here is the irrational part. The FOMC thinks the economy is doing well enough that it doesn't need any additional jump-starting. So, the stock market sold off because the underlying economy is doing better than expected -- huh?? Because expectations were not met, the market went down -- in the short run.
In the long run, the stock market has a closer relationship to the economy. The FOMC minutes were bad for the market in the short run but good for the market in the long run.
I expect the disappointed market will swoon for awhile, waiting the economy to catch up somewhat, before resuming its bull run.
Now, try explaining that to your grandmother . . . she's probably more rational than the stock market in the short run, even if not in the long run.
In the short run, the stock market is a contest between expectations and results. The expectation of Wall Street was that the Fed would, sooner or later, have to begin another round of quantitative easing (QE) to jump-start the slow economic recovery. It is also good for the stock market, because it drives down borrowing costs and drives up liquidity which usually finds its way into the stock market.
Yesterday, minutes of the last Federal Open Market Committee (FOMC) were released. It showed scant discussion of any future QE. In other words, Wall Street was disappointed and sold off.
But, here is the irrational part. The FOMC thinks the economy is doing well enough that it doesn't need any additional jump-starting. So, the stock market sold off because the underlying economy is doing better than expected -- huh?? Because expectations were not met, the market went down -- in the short run.
In the long run, the stock market has a closer relationship to the economy. The FOMC minutes were bad for the market in the short run but good for the market in the long run.
I expect the disappointed market will swoon for awhile, waiting the economy to catch up somewhat, before resuming its bull run.
Now, try explaining that to your grandmother . . . she's probably more rational than the stock market in the short run, even if not in the long run.
