Here's what we know for sure. From the opening bell until about 3 p.m. EST stocks staged a strong rally. Then, in the last hour of trading, the rally collapsed, with most indexes ending up about even for the day.
Bloomberg blamed the collapse on a House vote to curb credit card rates. The Wall Street Journal cited worries about a "lackluster" recovery. Megan McArdle attributed it to the Fed's decision to specify under exactly what circumstances it would start raising interest rates again.
McArdle's thesis is especially provocative, because most market watchers expected that the Fed's announcement that it would keep rates close to zero indefinitely would juice the market. But there's no doubt -- the timing of the market collapse and the news from the Fed were highly correlated.
But there's one other thing that happened about the same time the market collapsed. Noam Scheiber published a post demolishing the absurd thesis that the (then-ongoing) rally was a reflection of Wall Street's enthusiasm that Tuesday's election results represented a repudiation of the Obama "agenda" and "stopping the agenda is good for the market."
As Scheiber writes, "the reasons why this theory is utterly ludicrous are almost too numerous to catalog." You don't have to go much further than contemplating what a six month long market boom implied for Wall Street's faith or lack thereof in the Obama agenda. But moments after Scheiber's post, the rally suddenly ran out of steam, suggesting that, if investors had believed such nuttiness, they no longer did, probably because they had just read Scheiber. Which I guess, perversely proves the original thesis!
The truth, as my readers love to inform me, is that intra-day movements of the stock market are rarely explainable by any one factor, and we shouldn't waste precious blog-space trying to figure them out. But longer term movements are worth some head-scratching, which leads to a consideration of a troubling column published in Slate yesterday, by Dan Gross, "The Mystery of the Rising Stock Market."
Gross argues that the strong performance of the U.S. stock market since March has little to do with the prospects of the U.S. economy, and everything to do with the return to relative health of the global economy.
The Dow, the S&P 500, and the NASDAQ are primarily indices of large U.S.-based companies, not main street businesses: more Davos than Chamber of Commerce. These increasingly cosmopolitan firms have been busy globalizing and expanding their operations overseas. In 2006, according to Standard & Poor's, 238 members of the S&P 500 broke out revenues between U.S. and non-U.S. sales. These companies notched about 43.6 percent of sales outside the United States. For large companies that had already saturated the U.S. market, the home market was something of an afterthought. In the second quarter of 2007, 66 percent of Coca-Cola's (KO) beverage business came from outside North America.
This is a point I've been making here since at least last April, when I noticed that the companies that were doing best at resisting the slowdown in the U.S. were the companies that had the most exposure overseas. But while global growth might be good for stockholders and company execs, it's not clear how it helps everybody else.
GM's sales in China are rocking. In the first nine months, the company sold 1.3 million cars in China, including more than 181,000 in September. By contrast, GM in the United States in the first nine months sold 1.5 million cars in the United States, down 36.4 percent from the year before. And in September, GM sold just 156,673 cars in the United States. That growth in China is good for GM's shareholders and for some of its executives. But since most of the cars sold in China are produced there, with parts produced by suppliers in China, rising sales in the Middle Kingdom won't translate into jobs for unionized workers in the Middle West.
Before the global recession, there was much talk about whether Asia and the West had "decoupled" their economies. What some of us might not have realized was that the U.S. stock market had also decoupled from the U.S. economy -- and run off with Asia.