Tuesday, February 05, 2008
Stock market decline due to incorrect understanding?
Stocks drop (AP
): (emp add)
Stocks slumped for a second straight session Tuesday after Wall Street saw an unexpected contraction in the service sector as evidence that the economy is sinking into recession. The Dow Jones industrial average fell more than 350 points, while bond prices rose.
The Institute for Supply Management said its January index of the service sector, which accounts for about two-thirds of the economy, dropped below 50, indicating contraction. Economists had been expecting another month of growth; the last time the service sector contracted was in March 2003.
Story about the service sector index (AP
): (emp add)
The Institute for Supply Management reported that its index of service sector business activity declined to 44.6 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53.
Felix Salmon (Portfolio.com
): (emp add)
[look at] what everybody considers to be the cause of the drop: an index measuring service-industry executives' business activity dropped to 44.6 in January from 54.4 in December. But here's the thing: it's a brand-new index, called the NMI, which the stock market is (purportedly) reacting to. Yes, the NMI was at 44.6 in January, but there's no NMI figure for December. The 54.4 figure was in the business activity index, which fell to 41.9 in January, but that's a narrower and more volatile measure.
Yes, the index number is below 50, but the comparison of a new index number with that of a different index
in December is misleading.
Are we to assume that the market is sort of stupid, requiring us to look over its shoulder to correct its mistakes?
The market is not wholely rational, it is prey to contagious memes with high fear to reality ratios :-/ That's why the Fed goes to great lengths to obscure the sorry state of affairs in a thick haze of jargon that the bewildered herd doesn't understand, beacuse if they did, they might stop buying and start hoarding.
Enterik, I agree with you.
However, now we have created a picture of The Market which is totally at odds with the one of economic theory.
In fact, we have more aptly described a fortune telling scam at a sideshow ( "prey to...memes, ...fear....reality, ...to obscure...bewildered...) than we have described what is considered The Market.