On Monday this week, stock markets dropped sharply. The S&P 500 Index, a broad measure of large US stocks, closed down 2.57 percent from its level on Friday. That’s a pretty big move, actually. If you look at daily percentage changes over the last five years (not worrying about whether they are up or down), the size of this move ranked in the top 2 percent.
So why did it happen?
Looking over preceding news and published post mortems, one finds an array of possible explanations from which to choose:
- Democrats questioned drug prices on Monday, driving down biotech stocks.
- The fallout from Volkswagen’s emissions scandal appears serious. Wolfgang Munchau of the Financial Times on Monday added it to four ongoing crises: Syrian refugees, indebted eurozone countries (e.g. Greece), slowing global markets, and troubles in Ukraine.
- The mining and trading giant Glencore PLC revealed heavy losses. This suggested potential broader damage from a Chinese slowdown and reduced commodity demand.
- More directly, there are persistent worries about Chinese growth. And the Federal Reserve may well raise interest rates this year. Neither of these explanations really shifted on Monday, but they’re out there.
- And there are worries about a looming government shutdown. Or there are worries about House Speaker John Boehner’s resignation, though that would seem to diminish the odds of a near-term shutdown.
So which worry was responsible?
Before I reveal the answer, it is worth noting that one doesn’t need a single explanation for a market move. There are an awful lot of traders out there, and they can accept lower prices for multiple different reasons. You can pick a few traders and ask what’s on their mind, but that does not make them representative. And it can be hard to get a straight answer out of an algorithmic trading program.
Careful write-ups frequently note that certain news preceded a market move, without committing to claims of causality. A more popular approach is to pick an irresponsible act that bothered you (Market-hating Democrats! Rabid Republicans!) and explain that the daily market move vindicated your long-standing concerns about them.
The real reason for the market fall? The Cubs are heading to the World Series and the once-vaunted Washington Nationals choked. Literally. This is a clear sign of the End of Days.