When stocks go up, is that good? And when they go down, it’s bad?
That apparently is what many financial reporters assume, and they keep reminding us of it.
Below are examples of stock market news headlines from some major U.S. sources. What they all have in common: when the market went up, they said that was good, and vice-versa.
This is bad news. By that I mean, bad reporting. It betrays a misunderstanding of basic economics. See why below.
These headlines are wrong!
What’s wrong? Look at it this way. Stock prices come from trades on an exchange. By definition, every trade has a buyer and a seller. In any marketplace, sellers like high prices, but buyers like low prices, right? Thus in general, at any point in time, half of stock market participants would rather see prices fall. Why do we side with only one half of the market and call rising prices good?
Another perspective: Let’s assume you are a typical worker who invests a regular portion of your earnings in the stock market through a retirement plan. You should be cheering for prices to fall, not rise. At lower prices, you get more shares for your money. You only benefit from high prices after you retire and start making withdrawals, thus selling shares. Buy low, sell high. A down day in the market now, is a good day for you.
Or consider this: If rising prices are good, then was the dot-com bubble of the late 1990s the best of all possible worlds, which we should try to re-create?
Journalists: It is wrong and sophomoric to constantly sing the refrain, that a day when prices rise, is a good day for the stock market. Rising or falling prices intrinsically are neither good nor bad. They are good for some and bad for others; and then there are the traders who don’t care — they make their money on the volume, or the bid-ask spread.
And as you probably have learned along the way, stock market movements exhibit a significant degree of randomness.1 In that respect, its behavior has some resemblance to the weather. And by the way, is rain good or bad?
There are some possible counter-arguments to my diatribe above, so let me address those.
- You could make the point that rising stock prices increase the society’s overall wealth. In that sense, higher may be better. But as we have heard ad infinitum recently, wealth in our society is highly concentrated.2 Do we judge it a good day when the the top 1% of the U.S. population, who own close to half of all the wealth, get wealthier? I suspect most of the journalists who write these headlines don’t necessarily agree with that sentiment. Higher stock prices are good for those who have wealth, but bad for those seeking to accumulate wealth. And of course for many who have a foot in both camps, they are a mixed bag.
- Another objection hews to the textbook model that stock prices reflect the market’s assessment about future earnings of those companies. Thus rising prices, ceteris paribus3, indicate the market has upgraded its earnings projections, which maybe is good. But ceteris are rarely paribus. Earnings forecasts constitute one ingredient among many, of stock supply and demand. For example, people may sell stocks when they need cash to pay obligations. So their sale in that case puts downward pressure on prices, but for reasons unrelated to company prospects.
Some reporters do in fact try to answer the question, why did prices rise or fall in a given period. The reason typically is a different story each time. For example, rising interest rates in the fixed income market can attract investors to shift money out of stocks and into bonds. Or the market may be responding to political or macroeconomic considerations. Hurrah for the reporter who actually uncovers some logic to market movements. Many days, such logic is hard to discern.
In sum, I propose that all news editors add this rule to their style sheets: Although stock markets go up or down every day, these do not correspond to “good days” and “bad days”. Let’s keep those and related terms out of our reporting unless we have found a real reason for them!
- There are many treatises about randomness in the stock market; a good intro is by the Corporate Finance Institute: Random Walk Theory: A mathematical model of the stock market.
- Other things being equal