Ignoring the Daily Market Report

You’ve heard the same dribble I have on the daily market report. The announcer breathlessly says something like, “The Dow surged higher today on news that same store sales increased one-tenth of one percent in the first quarter.”

Three weeks later the compiler of the statistic posts a correction and it turns out the minimal increase was in fact a decrease of one percent. No mention is made in the commentator’s daily report on the day of the change because the markets rose that day and the poor guy needs to find some reason “there were more buyers than sellers.”

Let’s tackle that one first. For every share someone wanted to buy, someone else wanted to sell. If at a given price more people would like to buy than sell, the price moves up until either potential buyers drop out (because it is now too expensive) or more sellers show up because of the higher price. This leads to the classic supply/demand curve:

As demand for the shares increases from Q1 to Q2, the price increases from P1 to P2, shifting the demand curve upwards from D1 to D2. Prices could also increase when supply decreases while demand remains constant. When stock prices fall it is either because demand decreased or supply increased.

The other thing to keep in mind is that 50% to 70% of the trading in stocks today is between two computers. Computers make decisions based on complicated algorithms designed by their masters. While it is possible the one-tenth of one percent same store sales increase is a component in an algorithm here or there, my guess is it’s not a big driver and certainly not the only one.

Assume the government releases the statistic at 9:00 am. By the time the markets open the algorithms have already reflected the new statistic, meaning the computer already knows whether it wants to buy or sell at the opening bell and at what price. What’s happening the rest of the day? At best the release of the statistic is like a stone tossed into a pond that generates a few ripples. After that, clear water. It certainly is not the driver of all purchases and sales.

At the end of the day the markets went up or went down. Unless the change has caused your portfolio to become unbalanced, do yourself a favor and ignore the market pundit.

~ Jim