Did President Bush Cause the Market Rally?
Here at "A Dash" we admire and enjoy Larry Kudlow's show on CNBC. It is not because of the host's opinions, with which we often disagree. Larry is incorrigibly bullish about the economy and the market, and it does not hurt to get that perspective. What we really like is his ability to get a range of strong guests with serious and well-developed conclusions. It is a great way to get a fast read on the main perspectives from the day's activities.
An Astonishing Proposition
We were more than surprised by Larry's assertion that President Bush's New York speech had sparked today's market rally. We looked hard to see evidence of his tongue in his cheek!
The reason is simple. The market has had a pattern of selling during the speeches of anyone from the Bush Administration. It has been one of the most predictable and tradable "calendar" events of the last few months. In our office we discussed how to trade it. The market seemed to "want" to move higher before the speech.
Why? The old lows in the S&P 500 had been breeched, at least for a few minutes. InTrade, the prediction market site had just started a futures contract on whether these lows would be taken out. This contract lasted for about one trading day, which might be a record for brevity of duration. You can still trade whether the DJIA hits the lows again, now trading with a wide market around 50%.
There was plenty of buying interest at the old low, even before the President's speech. The market paused, and we speculated that traders would be cautious in front of the speech and more buying would ensue afterward. There were also plenty of trading calls on RealMoney, including Jim Cramer's prediction of a closing spike. (Full disclosure. We contribute and believe it to be a valuable source for trading ideas. We were long-time subscribers before writing there.)
This trading expectation, caution before the speech, buying afterward, was our expectation, as long as there was nothing really bad in the speech. Just get it over, and let the market resume normal trading.
The President had a number of applause lines by praising New York, the free market system, and America. There was nothing really new, and no one expects much from the waning days of the Bush Administration. Our view is that the Bush policies came far too late, but we respect the President's decision to react aggressively, and against his instincts, when faced with severe economic problems. But there was nothing in the speech to move the market.
The Wall Street Journal called it a "Gloomy Picture."
Dealbreaker asked if anyone was listening to the free-market message.
In a thoughtful assessment, Felix Salmon parsed various segments of the "peculiar speech" calling it "a mixture of free-market platitudes, cryptic code, and outright weirdness."
The new blog from MIT, The Baseline Scenario, was the most critical. There are many interesting observations, but here is the conclusion:
lame-duck president making campaign speeches when what we need are real
Larry Kudlow's Conclusion
We return to the Kudlow conclusion, not so much because we believe he is serious about this, but because it illustrates a typical problem of interpretation for investors.
Anyone trying to interpret the markets is constantly considering news.
- Is it "new" news or "old news?
- Is it really relevant?
- What would have happened in the absence of this information?
There are so many factors involved, and only one result. The temptation to make a false inference can seem compelling.
Readers may wish to review our warning about interpreting market action:
Do not just make a knee-jerk reaction. Think clearly. Think about
what is happening and the causes. That is the only way to spot
Somewhere between Miss Moss's Latin class in high school and Neil Browne's excellent instruction in critical thinking, we learned about a prominent logical fallacy. Once you know it you will see it every day.
You can look it up, but it means "after this, therefore because of this." It is one of the most common errors in logic.