Yesterday the Dow Jones Industrial Average fell the most it has in two months.\u00a0 Ostensibly the sell off was because of the dramatic fall in commodities prices, including oil, gold and silver.\u00a0 To me this is evidence of strange trading forces at work, rather than fundamental problems with the U.S. economy.<\/p>\n
Let’s think about it.\u00a0 If the cost of fuel falls isn’t that good for almost the entire U.S. economy?\u00a0 After all, the only businesses who cheer high oil prices are the oil companies themselves.\u00a0 Every other business and every consumer (even those at oil companies) celebrates lower expenses.\u00a0 It’s impossible to be agnostic about this.\u00a0 Businesses experiencing lower expenses have higher profits.\u00a0 Consumers experiencing lower expenses have more money.\u00a0 Duh!<\/p>\n
So shouldn’t these higher profits actually lead to a stock market rally?\u00a0 Why would lower oil prices lead to a sell off of the stock market as a whole?\u00a0 Without the data it is impossible to precisely pinpoint the reason.\u00a0 However, it is my feeling that the sell off is evidence of strange trading forces.<\/p>\n
The first point is for me to quote a piece of research that an intern of mine did many years ago (hello Matt Schildt).\u00a0 During the dot.com era where trading volumes for the S&P 500 were gigantic, on average only 0.6% of the ‘market’ traded on a given day.\u00a0 In other words, very few traders determine the price of all U.S. equities in a given day.\u00a0 So yesterday’s sell off is very likely to have been driven by a very small segment of investors who, nonetheless, were extremely vested in high oil prices.<\/p>\n
My second point is: who would have such a vested interest?\u00a0 That’s right, most likely it was a hedge fund that was unwinding a gigantic bet on high commodity prices, including oil.\u00a0 That would also explain some of the bleed through from the commodities market into the stock market as hedge funds frequently have bets in multiple markets simultaneously.<\/p>\n
In conclusion, that there was a big stock market sell off yesterday should not be seen as evidence of fear that the U.S. economy is not robust.\u00a0 Instead, it should be seen as evidence of the peculiarities of the hedge fund world and its byzantine trading strategies.\u00a0 If it wasn’t a hedge fund, it may just have been some big Wall Street investment bank with a similar, and gigantic bet, on oil prices and other commodities.<\/p>\n
Jason<\/p>\n","protected":false},"excerpt":{"rendered":"
Yesterday the Dow Jones Industrial Average fell the most it has in two months.\u00a0 Ostensibly the sell off was because of the dramatic fall in commodities prices, including oil, gold and silver.\u00a0 To me this is evidence of strange trading forces at work, rather than fundamental problems with the U.S. economy. Let’s think about it.\u00a0 […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4218","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4218","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4218"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4218\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4218"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4218"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4218"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}