News reports related to the fluxuations of the stock market are not surprising or inconsistent, but when I stop to consider what they say I find that they are either disturbing or based on faulty assumptions. This holds true whether we are talking about reports of falling or rising stocks and the report on today’s rally is a good example:
U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. . . the Dow Jones Industrial Average climbed more than 936 points.
The stocks and stock markets are supposed to give an indication of the value of the companies and economies they relate to. What is it about the plan by the Federal Reserve that makes any company better managed or more successful enough to warrant an 11% increase in value over one day?
The underlying assumption is that the government action is at the root of the deciding factors leading to the investment decisions of professionals and thus it is the hand controlling the puppet of economic production and has the right to interfere in the market as it sees fit. That assumption scares me because if we ever fully accept that premise we open ourselves to more overt government action in the markets. The more blatant the interference we will accept the more arbitrary those actions can safely be until we can find ourselves in an economic 1984 where the government can decide one day that it will give $700 Billion away and buy equity stakes in our financial sector and then the next day it can declare that it has no business interfering with corporate mismanagement and it can’t spare the $700 Billion anyway.
If that assumption is faulty – that government is the driving economic force and the basis for the decisions of investment professionals – then the news reports are misrepresenting the reasons for the rise and fall of stock prices so that we never begin to deal with the real causes of those economic swings, large or small. If professional investors are really deciding that stocks are worth more at the end of the day than they were at the beginning for reasons other than the government intervention then we should be told what indicators are being used to determine that the companies are worth more today than they were yesterday.