The Dow ended the day down 370 points, after being down more than 800 in midafternoon. How can this be explained?
1. Pure random chance. As Nassim Taleb writes in Fooled by Randomness:
To be competent, a journalist should view matters like a historian, and play down the value of the information he is providing, such as by saying, “Today the market went up, but this information is not too relevant as it emanates mostly from noise.”
That’s it! That’s my verdict: Today the market went down, but this information is not too relevant as it emanates mostly from noise. But then I read the next sentence in Taleb’s book:
He would certainly lose his job by trivializing the information in his hands.
Hmmm. Don’t want that to happen. Better come up with some other reasons.
2. Worries about the U.S. financial system have now become worries about the global financial system. And while the $700 billion bailout/rescue plan approved by Congress last week might have a significant impact in the U.S., everybody’s worried about European banks now, and it’s far less clear whether and how European countries will join together to do something similar.
3. Investors aren’t entirely convinced Treasury’s $700 bailout will work. They shouldn’t be convinced.
4. Worries about the U.S. financial system have become worries about the U.S. economy and global economy. Pretty much everybody agrees now that we’re headed into a global recession. That cuts into corporate profits, and that means stocks should go down.
5. Investors in most hedge funds aren’t able to pull out their money whenever they want, and instead have to wait until the end of the quarter or year. Sept. 30 was the end of a quarter, investors presumably pulled lots of money out of hedge funds, and so lots of hedge funds have been forced into selling stock. Which has put a lot of downward pressure on the stock market.
6. Nothing the Fed, Treasury and foreign governments are doing is working, the global financial system will collapse, and we’re all going back to being hunter-gatherers. That may be true, but if stock market investors really thought so the Dow would have dropped a whole lot more than 370 points.
7. Oh, and as for that big comeback in the last hour of trading: Maybe it had something to do with the price of oil dropping to $87.81 a barrel.