The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.
https://www.cnbc.com/2018/02/02/best-wage-growth-since-2009-...
Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure. Then people go back to their drawing boards and see if the hypothesis holds up. If not, they come back and market moves higher.
No. Obviously when I say "everyone decided to sell" I'm speaking figuratively.
In any case, thanks a lot for that link. Cool stuff, I didn't know about the NFP. So if it was released Friday in the morning, how come the plunge happened only happened Monday? I still prefer my view that a tiny bit of data cause people to expect a drop and get edgy, and at some point they all start selling. ("all start selling", again figuratively.)
This is opposed to a bunch of people having done some ahead of time calculations like "if the NFP comes out about X we sell, if it comes out below X we buy. Oops it's about X, lets sell". I suspect very few market participants behave like this. (Agains, below/above X is figurative. I do understand what a probability distribution function is, what an expected value is, etc.)
So here's one for you. If your reasoning is correct I would've expected to see treasuries down (which indeed was the case Friday). Instead they went up. How do you explain that?
It started on Friday and accelerated on Monday. Adjust the chart to 5 days. Note the significant dip down right at the beginning of Friday 2nd followed by an all-day slide.
https://www.google.co.uk/search?q=dow+jones+chart&oq=dow+jon...
In the current NFP consensus on this one was 181k while the report was 200k which is nearly 10% variation from the expected value.
As for treasuries, the upward movement is expected. It is considered to be a safe asset in the sense that there is a fixed return. Equities on the other hand are considered risky assets. So, for the most part they are negatively correlated. Markets are down, then bonds should go up.
That said, markets and crowd wisdom are not perfect and don't always reflect all the information correctly all the time.
Will check out older NFP, thanks.
> Tiny bit of data?
I phrased it all wrong. What I wanted to convey is a lot of data points slightly pointing in one direction, none of which move anything individually, but at some point people realize that everything in pointing in a downwards direction, and get scared.
Anyway, thanks for the chat.
Of course, real decisions are made on figures. The actual way of making this decision would be to compare the bond yield with the expected inflation. If expected inflation is higher than the bonds yields I'm going to sell my bonds for cash and so will a lot of people, so the bonds price will drop and the yields will raise until a point where they're attractive again.
But yes, it is hard.
Treasuries become risk aversion vehicles during large equity sell-offs. Whatever downward pressure was put on them for a hypothetical rate raise was dwarfed by the fear driven movement from stocks into bonds.
Why into US treasuries you might ask. It's because they are a nearly risk-free way of parking money at a better rate than the money market while maintaining good enough liquidity to easy sell back out of the position.
The stock market works on supply and demand. For every seller, there needs to be a buyer. Let's assume that TSLA stock changes hands at a rate of 10k shares per day on average. The NFP report could cause a number of potential buyers to decide to hold off on buying. Assuming the sell interest is constant, this would likely result in a price drop. So no one has to actively buy/sell on the data in the NFP report (although some people might do that). If the NFP report causes buyers to stay home, prices will go down, and if it causes sellers to sit on their stock, prices can go up.
And of course this greatly oversimplifies reality. In any given day there are probably a number of different factors influencing sellers and buyers. Some people might be selling/buying to rebalance a portfolio. Some might be buying for their 401k. Some might be selling to cash out employee stock options. Some might be daytrading on the NFP report. And the movement in price is largely just a result of any aggregate imbalance between supply and demand. For me personally, I have stopped buying stock because I think the market is too overvalued right now. I know a few others how have stopped as well. As more people do this, the 'buy side' gets thinner increasing the odds of a drop.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/i9Zchv.nY_N...
The treasury move since September is one of the most aggressive of the last five years.
What happened is simply an inflection point. Markets operate heavily by trigger points. Those are getting taken out, sparking reactions (selling, asset allocation adjustments). The Dow went up three thousand points in two months, after the market was already at bubble price levels on multiples.
Shiller PE:
http://www.multpl.com/shiller-pe/
These valuation levels are batshit crazy. It doesn't take much to crash something that over-extended.
Let's be realistic here. Where was this market going from there? Dow 36,000 by 2019? A 45 PE for the S&P 500? It'll already take ten years of 3% US GDP expansion and higher global growth to bring the S&P's earnings multiple back to being close to reasonable.
Someone found out they had cancer, sold their shares, their broker thought they were acting on a tip-off because the women with cancer mentioned they play tennis with some CEO. The broker, goes short for all they're worth thinking it's their big opportunity, and recommends to others to sell (to guarantee the fall!), stock starts to fall, trips an algorithm that's looking for a particular gradient on index Y, ... meanwhile a rookie at a trading firm sells 1000 something instead of buying ... people who lost on Bitcoin recently are on edge and feeling cautious, a little blip and they want to end their position ... and on and on the snowball rolls.
Someone sneezed in Mogadishu seems just as likely to be the "reason".
When things avalanche like this, the size of the response is determined by the size of the instability, not the size of the triggering event. Consequently, you cannot understand the event by looking at its trigger, but if you would like to know what sort of considerations the trigger was comprised of, the fact that the new Federal Reserve chairman is avowedly more determined to raise interest rates than his predecessor is as good as any.
As to what triggers the move itself - my feeling is that some kind of crowd effect occurs, i.e. once we get over some resistance level, then the movement implied in the imbalances described by the context takes over; the crowd creates its own impetus. But it is very difficult or even impossible to determine ahead of time what minor movement will become the catalyst, in much the same way that determining which butterfly flap vortex will become a hurricane.
"blah blah hindsight bias blah blah rationalization blah blah"
At the end of the day, the only useful theories for the stock market are the ones that have predictive power. I'd be interested in reading articles by people who are consistently willing to put their money where their mouths are and consistently make money on their theories' predictions, but anyone who can do that of course tend to know better and tend to keep their mouths shut.
There is clearly some causality in the economy. There is also a causal relationship between the economy and the stock market.
It's just that identifying a correct causal relationship or correlation and even making a correct prediction doesn't make you any money if everyone else is making the same correct prediction.
How much was fingers on buttons, and how much was just automated trading algorithms?
Algorithms were definitely a contributing factor to the 1987 Black Monday crash (in that case, "portfolio insurance", basically implementing a simple stop loss policy by going short (through direct sales, or purchases of puts)).
It takes very few people to move the market. To dramatically oversimplify, if there are 1 million buyers and 1 million and 1 sellers, the market goes down until the number of buyers and sellers are equal again.
We can argue over whose dramatic oversimplification is worse, but do you disagree with the basic point that a small number of people can dramatically move a large market?
A lot of the run up since the end of last year was based on Trump's new tax plans, which the left were very much against, so it makes sense that measures would be taken to roll that back were they to be in a position to do so - and I'd expect that people are nervous because (unpopular as Trump is in polls) no-one knows how that's going to go.
It seems (like here in the UK to be fair) that it's going to be a toss of a coin as to which extreme your economy is swung towards in the next election.
Also, new money is entering the financial markets all the time that doesn't have the past experience of the ups-and-downs. People can be well read on the topic and still not have a steady hand when it comes to the first turbulence event they experience with their savings, so there will always be (or at least, has always been) a proportion of panic sellers in the market at any one time.
(edit: This reads like I'm very right-wing. I'm really not, all I mean is that the market has gone up because of the big giveaway that might be snatched back again soon.)
No chance of that happening until 2021 at the earliest, thanks to the presidential veto. The Democrats have zero chance of obtaining a veto-proof majority in the in the Senate.