55. Stock markets after the election or Why you should understand economics

I have found a good example of the problem that has been bugging me for a long time: explanations of what happened in the stock market. There is a whole industry trying to explain each day what happened: why stocks went up, why they went down etc. The problem is that, even with the benefit of hindsight, some of those comments do not make much sense. Hindsight is supposedly 20/20, but not in the case of financial commentators. I do not know why. But I do know that all these explanations sound plausible. To distinguish good from bad from nonsense you need basic financial and economic knowledge.

So to the example. Yesterday President Obama was reelected. Today markets fell by around 3%. Why?

This article  explains that "investors' focus shifted to the looming "fiscal cliff" debate and Europe's economic troubles."

That article explains that "despite the fact that polls had been indicating for some time that President Obama was likely to win, that expectation was not shared by many financiers."

Who is right? The first article sees investors as not being able to do two things at once: follow an election and focus on the fiscal cliff and Europe's problems. They devoted all their attention to the election and only with the election over they noticed other problems.

That is silly.

The second article uses reasoning based on one conclusion from the efficient markets hypothesis: expected events do not affect stock markets. So the fact that markets reacted negatively to Obama's win means that investors did not believe he will win. That is surprising because the numerous polls left little doubt, but never underestimate people's ability to delude themselves in political matters.

So the second explanation makes sense, the first does not.

In the future you will be playing the markets so you need to understand the causes of market movements.