Beware the rally
"CALM RETURNS AFTER SELL-OFF," declares Drudge, as the Dow, S&P and Nasdaq rally in early trading.
But beware this rally -- or rather, beware the complacency it could inspire. It would be deeply irresponsible for opponents of the bailout to seize on these numbers as proof that the consequences of inaction weren't actually that bad, after all. I'm no market expert, but this reminds me of premature "it could have been worse" crowing from the anti-alarmist crowd when hurricanes hit land and initially seem to fall short of worst-case scenarios. It seems obvious to me that traders are reacting to the perception that yesterday's sell-off was a premature overreaction because a bailout is still going to happen, one way or another. That's certainly the signal that leaders in Washington are trying to send, and the markets are clearly getting it.
There's a weird inverse relationship here between the stock market and the chances of the bailout's passage. The psychology of it all is very odd. Congress and the public look to the stock market for insight into what investors are thinking. But really, they're looking into a (potentially very distorted) mirror, because what investors are primarily thinking about right now is: what will Congress and the public do? The markets are responding to traders' perceptions and predictions of what will occur in Congress, but those reactions themselves also have the potential to shape events, quite possibly in the opposite direction of what the traders want. If investors get too pessimistic, the result they want (i.e., passage of the bailout) becomes more likely. If they get too optimistic, the result they want becomes less likely. Weird.
In any case, if this temporary recovery in the stock market convinces legislators and their constituents that the bailout is unnecessary, then I imagine there will be a rapid reversal in the recovery that'll make yesterday's sell-off look like a walk in the park. Maybe that's okay. Maybe it's better to rip the band-aid off quickly. Maybe the consequences of this particular proposed action are worse than the consequences of inaction. If so, bailout opponents should say that. They shouldn't hide behind deceptive market numbers to mask the real-world consequences of what they are proposing. If you think rejecting the bailout is worth a 3,000-point drop (or whatever) in the Dow, a massive reduction in the value of everyone's 401(k) plans, and a tremendously challenging period for the credit markets and thus the broader economy, then by all means, make that case. I'm open to the argument. All I ask for, from the bailout's opponents, is honesty -- with yourself and with your constituents (or, in the case of right-wing radio hosts and bloggers, your listeners and readers) -- about the consequences.
But hey, what do I know? Again, I'm not a market expert. I'm just some guy with a blog -- and a new job, a family to support, a whole bunch of student loan debt to pay off, and a foreseeable future need for a mortgage and a car loan, who is imminently moving to a place with a higher cost of living, and who is, for all of the above-stated reasons, feeling just a wee bit nervous at the moment. Ahem.
But beware this rally -- or rather, beware the complacency it could inspire. It would be deeply irresponsible for opponents of the bailout to seize on these numbers as proof that the consequences of inaction weren't actually that bad, after all. I'm no market expert, but this reminds me of premature "it could have been worse" crowing from the anti-alarmist crowd when hurricanes hit land and initially seem to fall short of worst-case scenarios. It seems obvious to me that traders are reacting to the perception that yesterday's sell-off was a premature overreaction because a bailout is still going to happen, one way or another. That's certainly the signal that leaders in Washington are trying to send, and the markets are clearly getting it.
There's a weird inverse relationship here between the stock market and the chances of the bailout's passage. The psychology of it all is very odd. Congress and the public look to the stock market for insight into what investors are thinking. But really, they're looking into a (potentially very distorted) mirror, because what investors are primarily thinking about right now is: what will Congress and the public do? The markets are responding to traders' perceptions and predictions of what will occur in Congress, but those reactions themselves also have the potential to shape events, quite possibly in the opposite direction of what the traders want. If investors get too pessimistic, the result they want (i.e., passage of the bailout) becomes more likely. If they get too optimistic, the result they want becomes less likely. Weird.
In any case, if this temporary recovery in the stock market convinces legislators and their constituents that the bailout is unnecessary, then I imagine there will be a rapid reversal in the recovery that'll make yesterday's sell-off look like a walk in the park. Maybe that's okay. Maybe it's better to rip the band-aid off quickly. Maybe the consequences of this particular proposed action are worse than the consequences of inaction. If so, bailout opponents should say that. They shouldn't hide behind deceptive market numbers to mask the real-world consequences of what they are proposing. If you think rejecting the bailout is worth a 3,000-point drop (or whatever) in the Dow, a massive reduction in the value of everyone's 401(k) plans, and a tremendously challenging period for the credit markets and thus the broader economy, then by all means, make that case. I'm open to the argument. All I ask for, from the bailout's opponents, is honesty -- with yourself and with your constituents (or, in the case of right-wing radio hosts and bloggers, your listeners and readers) -- about the consequences.
But hey, what do I know? Again, I'm not a market expert. I'm just some guy with a blog -- and a new job, a family to support, a whole bunch of student loan debt to pay off, and a foreseeable future need for a mortgage and a car loan, who is imminently moving to a place with a higher cost of living, and who is, for all of the above-stated reasons, feeling just a wee bit nervous at the moment. Ahem.
posted by Brendan Loy at
9/30/2008 09:58:00 AM
