Stock Market Reacts!

According to an AP wire piece by Tim Paradis titled “Stocks fall on midterm election results”,

Wall Street retreated Wednesday after Democrats scored a huge victory in congressional elections, raising questions about how sympathetic the federal government will be toward business.

There are three problems with this observation.

First, by “Wall Street,” he means the Dow Jones Industrial Average, which is down 22 points from yesterday’s close (at the time I’m writing this). The Dow is a useful market indicator, but it’s only an indicator. Some stocks go up, some go down. There are winners and losers today.

Second, this what economists call “up-down reporting” and it’s largely useless. As I write this, it’s still morning and the component stocks of the Dow Jones Industrial Average have already traded 140 million shares. That’s got to be thousands of people making those trades. No analyst from the AP or anywhere else could possibly have determined how and why all those decisions were made.

Third—and this is the most basic problem—the Democratic recapture of the House is not a surprise to me or anyone else, including investors. They’ve seen this coming for weeks or months, and they would have been adjusting their valuations of stocks well in advance, and they would have been investing based on those valuations. The market prices before the election already reflected the value of the stocks assuming the Democrats were likely to take the House. Therefore, effect of the election on today’s stock prices was not caused by the results of the election, but by the difference between the results investors were expecting and the actual results. Without more evidence, we don’t know what that difference really was.