In December 2012, we wrote a blog post “Predicting the Outcome: Weighing the Facts”, we tried the explain the theory behind Benjamin Graham’s adage: “In the short term, the market is a voting machine. In the long term, the market is a weighing machine.”
Last week has been a pretty good example of this dichotomy. Market watchers have noticed that the past few weeks have been pretty rough. As company earnings data gets reported and absorbed by the markets, the swings can be drastic. For example, on Tuesday October 14th, the Dow Jones Industrial Average closed at 16,315. On Wednesday, October 15th, the market had experienced two distinct dips and recoveries of hundreds of points, reaching a midday low of 15,872 before recovering most of the intraday losses by the end of trading. To top it off, Friday October 17th was the best single trading day of 2014, with the DJIA rallying almost 300 points by the end of the day.
Every trading day generates new data and these isolated factoids are turned into daily binary vote of optimism or pessimism. Only after all these daily votes are absorbed and the relative strength of the arguments for bullishness or bearishness are compared, can an overarching economic narrative be established.