The market didn't rally today because, as the Post claims in its tease, investors are confident "that at least some damage from credit crisis is finally mitigating." The market rallied because they think the crisis might lead to another interest rate cut.
The headline of the article - Stocks Soar Along With Hope for Rate Cut - gets closer, but it still isn't right. It isn't "along with." It is "because of."
I don't understand why this is so hard for people to understand. Aggregate measures of the stock market aren't a measure of our nation's economic health, nor are they even much of a proxy for it. The market, first and foremost, is a form of legalized gambling based on both short and long-term economic, political, and social concerns. Just like poker, the goal is to come out ahead of everyone else in the end. Just like poker, for every winner there is a loser. Just like poker, it is as much about the perceptions of the people playing as it is about their reality.
In aggregate and over the long-term, the crowd that is "the market" may in fact be very wise. But in the short term? A 300 point gain isn't a sign that we've reached the end of the crisis. It isn't even a sign that market insiders believe we've reached the end of the crisis. It's simply a sign that they believe - for today at least - that interest rates will be cut soon, and that as a result it is more likely than not stock prices will continue to rise over the next few weeks.
Here are some of the stories from today - stories that the Post has buried under a huge headline about the market, mind you - that actually tell you something about our economy:
Existing Home Sales Fall AgainHit by a severe credit crunch, existing home sales fell for the eighth straight month with median home prices dropping by a record amount.
The National Association of Realtors reported Wednesday that sales of existing homes dropped by 1.2 percent last month to a seasonally adjusted annual rate of 4.97 million units. That represented the slowest sales pace on record going back to 1999 and was 20.7 percent below activity a year ago.
The median price of a home sold last month, the point where half the homes sold for more and half for less, declined to $207,800, a drop of 5.1 percent from a year ago, the biggest year-over-year price decline on record.
The October weakness was blamed on the fallout from a serious credit crunch that roiled financial markets in August. Banks and other lenders have tightened credit standards in response to a soaring level of defaults, especially on subprime mortgages _ loans provided to borrowers with weak credit histories.
Analysts predicted that prices will have to drop further in order to work down historic levels of unsold homes and the slump in housing, already the most severe in more than two decades, could last for another year.
"The light at the end of the housing meltdown tunnel appears to be an oncoming train," Joel Naroff, an economist with Naroff Economic Advisors, said in response to the new figures. "With so many choices and so few buyers, the median price is cratering."
Wall Street, however, took the latest bad news on housing in stride, preferring to focus instead on comments from Federal Reserve Vice Chairman Donald Kohn that were interpreted as offering the hope of further Fed rate cuts....
In another sign of spreading economic weakness, the Commerce Department reported that orders to factories for big-ticket manufactured goods declined by 0.4 percent in October. It was the third straight drop, representing the longest stretch of weakness in nearly four years.
Especially troubling was the fact that the category which represents business investment plans dropped by 2.3 percent, the biggest setback since last February. Economists had been hoping that business investment spending would cushion some of the impact from the housing slump.
And this....
Fed: Economy Loses Speed, Shopping SlowsThe economy grew at a slower pace in the late fall as shoppers watched their pennies heading into the busy holiday season.
The Federal Reserve's new snapshot, released Wednesday, suggested the strains from a severe housing slump and a painful credit crunch are affecting the behavior of individuals and businesses alike _ making them somewhat more cautious.
Besides "relatively soft" spending at the nation's retailers, the Fed survey said manufacturing production was mixed. Demand was weak for products related to housing but was solid in other areas, including information technology equipment and machinery used in the energy sector and mining industries.
In a separate report from the Commerce Department, orders for costly manufactured goods dropped 0.4 percent in October. It was the third straight decline.
On the inflation front, the Fed report said expensive energy and food put "significant" pressure on the prices of products and services that rely heavily on these materials. But most other prices were largely stable or down a bit, the Fed said. That suggested that high energy and food prices aren't spreading inflation through the economy.
National employment conditions are still mostly good, although construction and other jobs have taken a hit. In general, increases in workers' wages were moderate. The positive forces of job creation and wage growth are helping to offset some of the negative forces of weaker home values and harder-to-get credit.
But hey, bad news filled with technical details isn't sexy, so they play up the 330+ point gain as if it was somehow meaningful.
Why oh why can't we get a better press corps?
UPDATE: Kevin Drum gets it:
Now see, if it were me I'd be running for the hills at this news. Sure, Kohn was signalling that the Fed might cut interest rates, but he was only doing that because he thinks there's a danger that the economy might be tanking. So here's the difference:Kevin: Economy tanking = bad. An interest rate cut is nice, but it doesn't nearly make up for a bad economy. I'm going to go hide in a cave.Wall Street: Interest rate cut = good. Who cares if the economy is souring? Let's party!
Yes, sure, lower interest rates make stocks a relatively better investment than bonds, and that's good news for Wall Street. But the effect is small, and the stimulative effect of an interest rate reduction is both small and far in the future. A declining economy, by contrast, is bad news right now, and the vice chairman of the Fed just warned us that he was afraid the economy might indeed be declining.
Subscribe to this blog's feed
