How Surprising is it that the Dow Dropped After the Debt Ceiling Deal?
I saw a headline from a CNN newscast from last evening that read “Dow Drops Despite Debt Deal”. With the disclaimer that you don’t want to attribute too much significance to a single day’s movement in the stock market, I don’t see the drop as paradoxical or even random.
The first chapter of any book on technical finance will tell you that stocks and bonds move in opposite directions. When “the market” feels investment opportunities in businesses are likely to pay off, money moves towards stocks and away from the assumed safety of bonds; when “the market” feels there are fewer good business investment opportunities, money moves towards bonds.
The down-to-the-wire debt ceiling negotiations jumbled the traditional logic and created a perception that bonds weren’t as safe as usual. The eventual deal mitigated the worries.
So, if I may borrow Justin’s juxtaposition from a previous post, it would not be surprising if a restoration of confidence in the ability of the Federal government to make its debt payments on time led “the markets” to wager that investing in the government’s ability to tax is once again a better bet than actual investment in productive enterprise.
Who says that markets are rational all of the time!