The obvious answer is that no one knows for sure. But let’s discuss some options:
Bloomberg points to expectations of fiscal stimulus. But what news do we have today that would make fiscal stimulus more likely? One can argue that the Georgia election results increased the likelihood of more stimulus, but that information was fully priced in yesterday morning, and indeed mostly priced in Tuesday night (when stock futures declined.)
Another possibility is the turmoil on Capital Hill yesterday. You might expect that sort of chaos to hurt stocks, and indeed usually it would. But in this case, one side effect seems to be a weakening of what one might call “Trumpism”. Maybe that boosted stocks.
A counterargument is that President Trump was good for stocks. But it’s always important to think in terms of effects at the margin. The Republican agenda of tax cuts and deregulation was probably good for stocks. But that sort of policy would likely be continued by future GOP nominees. On the other hand, Trump’s signature issues such as protectionism and immigration restriction were less popular on Wall Street.
Stock traders might view the week’s turmoil as being likely to nudge the GOP from Trump-style conservatism to a more palatable Mitt Romney approach (although I don’t think he would lead that movement.) In addition, if Trump becomes less of a political force then the GOP may be better able to regain support from moderate voters, a prospect that Wall Street might view favorably.
I realize that this is all speculation on my part, but I would not rule out the possibility that this stock rally is about more than just the Georgia election.
READER COMMENTS
D.O.
Jan 7 2021 at 5:59pm
If it is politics, maybe it is the fact that Trump de-facto conceded, rather than, I dunno, making cocamine plans to prevent Biden’s inauguration by insisting that Roberts may refuse to administer the oath.
Scott Sumner
Jan 7 2021 at 7:38pm
Perhaps, but I doubt the market ever seriously believed that Trump would refuse to leave office in the end. Yes, he tried to reverse the election, but it was abundantly clear that the courts (and Congress) were not going to go along.
sty.silver
Jan 8 2021 at 5:13am
Less than a week ago, I invested another 2000€ into nTrump tokens on a crypto market that was still trading them at <90ct. This changed the price by about two and a half cent upward. When I checked again a few hours later, it was back to <90ct. That means there are people who understand probability, are savvy enough to handle crypto markets, and think Trump has at least 10% to still win, after losing left and right in courts.
I get that betting markets are tiny compared to stock markets, but why exactly would we expect this effect to disappear if more people participate and the total amount of money is a few orders of magnitude higher? The bar of entry on these markets is actually lower because you don’t have to handle cryptocurrency. My understanding of the supposed mechanism was that a few smart gamblers exploit such weaknesses whenever they appear, but the entire market is so large, and so many people believe that the election was illegitimate, that they may just not have enough money to do that.
The EMH isn’t really a binary thing but a spectrum. The question is, how efficient is the market. At this point, it wouldn’t shock me if it were inefficient with regard to whether Trump can still win while being efficient with regard to much more complex things. We know there are people with very dumb believes who are nonetheless smart in other fields. In the case of Trump, there are millions such people.
I’m especially willing to believe this because the stock market’s behavior wrt Covid proved that, sometimes, you can find money lying on the streets, even if you don’t know anything about stocks.
(That said, I wasn’t smart enough to predict ahead of time that stocks would rise as Trump’s loss becoming more obvious, provided that’s indeed what happened.)
Scott Sumner
Jan 8 2021 at 12:09pm
You said:
“but why exactly would we expect this effect to disappear if more people participate and the total amount of money is a few orders of magnitude higher?”
Because it’s hard to get rich, otherwise we’d see lots more rich people. And there’s empirical evidence for this—you rarely see this sort of obvious mis-pricing episode in actual deep and liquid markets.
Having said that, I’ve been surprised by the weird post-election political prediction markets, as usually even small prediction markets do pretty well.
cove77
Jan 7 2021 at 9:33pm
Scott, i’d be wary of using “fully priced in” with just one day’s worth of trading with any news stories/data releases. It wouldn’t be unheard of to buy incrementally over a period of minutes/hours/days when a mkt makes a new high or crosses an important signal/threshold(200 day mov avg) or on a sole projection. Long end of UST has gotten crushed since Tue nite on prospects for fiscal stimulus, while munis are rallying w/ Dem Congress. It’s not difficult to forsee a money mgr purchasing munis/selling UST every day, every week for a very long time after Tue nite’s vote. No mgr of any size is going to put on their entire position on the announcement, “AP projects…” at 2:30 EST.
Scott Sumner
Jan 8 2021 at 12:10pm
Markets don’t move on trading, they move on information. If the price responses were delayed, it would be easy to get rich.
Justin
Jan 8 2021 at 12:52pm
The price moves immediately upon information being released in an unbiased way, but that doesn’t mean it won’t change in the coming days as the information is processed and better understood. We can think of the immediate price response as a random variable with high variance, with the variance shrinking as the market comes to terms with the news. That’s why event studies look at prices for days after the event occurs do draw conclusions.
And variance without bias does not give investors an arbitrage opportunity, so it’s not true that delayed price responses results in a free lunch.
Scott Sumner
Jan 8 2021 at 6:28pm
Right. But in that case it’s much harder to know why the price responded. Not saying it’s impossible, just difficult. The information being processed is itself a sort of new information.
Thomas Hutcheson
Jan 8 2021 at 5:21am
I’d say it was the reduction of the tail risk of something even more Trumpian than the assault on the Capitol.
Cove77
Jan 8 2021 at 8:39am
Just wanna add I’ve read Midas Paradox…some parts 2-3x…it’s brilliant and many mkt truths are eternal but I’m not sure Jesse Livermore would have had as much successes…and failures in a world of algos
Scott Sumner
Jan 8 2021 at 12:10pm
Thanks for reading the book.
Alan Goldhammer
Jan 8 2021 at 9:01am
The answer is pretty simple. With interest rates close to zero, there is precious little opportunity for gains in the bond market and it’s forcing investors into equities. I sit on the investment committee of a mid-sized non profit and we have moved away from the traditional 60-40 portfolio for this very reason.
The bigger issue is whether equities are approaching “bubble” territory and GMO co-founder Jeremy Grantham has just warned of this in a post just last week. There is a good argument to be made based on CAPE valuation.
The only thing that is for certain is that it’s a difficult time for those of us who manage portfolios!
Scott Sumner
Jan 8 2021 at 12:12pm
Yes, but this week stocks have been rising at the same time as interest rates. I agree that low rates help explain the high P/E ratios, but rates did not fall in the past few days.
Cove77
Jan 8 2021 at 10:33am
Curve can only steepen…US 10 yrs next stop 1.36-1.40….more fiscal stimulus, prospects/efficacy of vaccine/continued (semi bogus) taper tantrums.
Trade should accelerate post 1/20…..scary how media thinks we “survived” the worst….still 12 more days of Exec uncertainty…who’s getting intel at moment? Trump /Pence/Biden ? R they all on same page ?
Fred_in_PA
Jan 8 2021 at 1:22pm
Two thoughts:
(1) “Buy on the cannons; Sell on the trumpets.” And a lot of people seem to think “thems was cannons!” (I agree, but I’m much less certain than most where the firing is coming from.)
(2) With Georgia’s loss of the Senate, we’ve kicked off the brakes on Democratic Party legislative excess. The rational view is that this foretells much greater uncertainty about the future of the country, its economy and society. (Worst case; the U.S. is about to turn into Argentina.) In such a scenario, you would want to be out of paper / fiat securities and into hard assets. (Which predicts that dollar prices of metals, real estate, jewelry, directly owned commodities, perhaps under-appreciated art works, etc. should soar.)
The question was, “Why are stocks up today?” I don’t know. But perhaps people think that when they own shares of Ford, they own (admittedly minuscule) slices of an automobile plant. But they may discover that their ownership claim is only effective when the government wishes to tax those owners.
Scott Sumner
Jan 8 2021 at 6:30pm
There are still “brakes” on Biden, as getting all 50 senators to agree is not always easy, especially for controversial stuff.
Todd Ramsey
Jan 9 2021 at 8:28am
Monetary stimulus. 10 Year TIPS spread up to 2.06, highest level since November 2018. Market moves have closely followed TIPS spread since March.
Sean
Jan 11 2021 at 8:57am
This isn’t the answer you would like in stocks – but a lot of the moves we see in markets are related to hedging of options trades. In my opinion in the short to medium term (months) those flows dominate any kind of fundamental news. A lot of puts a were bought for the election. The hedging of those trades continues to supper the equity markets.
A decade ago fundamental flows seemed to dominate but now its quant flows related to options and passive.
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