Lauretta wrote: ↑
Fri Oct 12, 2018 7:16 am
watchnerd wrote: ↑
Fri Oct 12, 2018 6:43 am
Lauretta wrote: ↑
Fri Oct 12, 2018 3:46 am
Nisiprius post is very odd to me. He speaks of the dividend discount theory and rising rates. Yet rates did not rise suddenly overnight to justify the drop on Wednesday morning in US stock prices.
The market doesn't have to look backwards or react to what happens.
The market can look forward, i.e. "price in", what people think is going to happen.
If people think that interest rates are going to continue to rise, then the dividend discount theory can lead them to sell.
these are good points, but do you think that on Wednesday morning people suddenly thought that interest rates were going to be significantly higher than whant they had thought up to then? If so, why?
And how can the DDM explain the fall in stock prices in Europe, at 3.30 pm (the time at which the markets opened in the US)? Did European also suddenly think that rates were going to go up in Europe too, faster than previously expected?
Interesting. I have a story, a fairy tale if you wish, built on DDM and EMH and Behavioral theory... that all have a role in explaining the drop. I tend to think of strong market movements sometimes like pressure building in earth's crust prior to an earthquake. Little things build and build and build, and sometimes nothing comes of it, or it takes a very long time. Sometimes, something gives, and the plates shift. I think a big part of why the plates shifted this week was the realization that the FED really is serious about increasing rates for the next 1-2 years; it seems a lot of doubt was built into prices, and now FED direction is being given more credence, and there are real DDM implications to that. I don't think this was the trigger, this is what enabled the trigger. In the camel analogy, this was the big load the camel carried. I don't know what the straw was. The trigger was probably something minor, but was enough to tilt conviction just enough to drive a number of sell orders big enough to trigger the drop. Was there an over-reaction? Probably. Why did the rest of the world drop also? Because everyone knows the US plays a key role in the Global economy. Was that overdone? Probably. I think most dramatic movements are overdone (but not always. Sometimes the risk is greater than first realized.) The FED's stance also reflects a lot of confidence in the US economy, which is a realization that I think takes longer to percolate across the investment world with any conviction (this part is mostly behavioral; fear being immediate and strong, greed taking longer to gain traction)... and so a week later the markets turn back up, perhaps because that conviction is growing, and opinion has shifted back somewhat. Whether they will immediately recover in full or not depends on many things, but if the DDM impact is believed significant enough (net of all the other considerations, which are many), then we may settle a bit lower than a week ago, if nothing else intervenes to tilt prices one way or the other (and something always does, right?). This all is all still pretty consistent with EMH, people reacting swiftly to what they know, using their best judgement at the time (which judgement is perhaps refined over the space of a week or two.) In the end is this what happened? I guess if someone cares enough to make the case and everyone accepts that explanation, then perhaps so... & maybe someone else crafts a more convincing story, which is fine too. In the end people want to think they know a simple reason for the marked decline, without taking the time to really understand the causality (which may be too obscure to identify anyways)... so the final explanation in the media will usually be simple and wrong. The story above is what makes sense to me, but I'm probably wrong too, on multiple levels. Still I suspect that the models mentioned above are mostly correct, do identify key market mechanisms, all of which do interact.
An investment in knowledge pays the best interest.