The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

What Happened Yesterday?

03/02/2011

The Dow dropped 168 points or 1.38%. The first day of each month is nomally a good day for the market and has been up for seven months in a row. Some analysts link yesterday’s drop to the mideast turmoil, but that is hardly news. Some link it to oil hitting $100/barrel again, a sympton of the mideast turmoil. Some link it to Bernanke’s congressional testimony, in which he said the U.S. could weather more expensive oil.

I think one clear contributor to the drop was the continuing insider-trading scandal. Yesterday, a board member of both Goldman Sachs and Proctor & Gamble was named. This reminds me of the many previous scandals. Retail investors are painfully reminded that “the game is stacked against the little guy.” As a result, the normal monthly inflows into equity funds that occur on the first of each month were disrupted. That was a lot of bad news, but legal actions are the least predictable.

This morning, futures indicate the market will open down modestly. Of course, Bernanke is speaking again before Congress, and the market may react to something he says. Normally, the market gets quiet just before the monthly Jobs Report, which comes out this Friday.

So, what happened yesterdy? The market is highly efficient in the long-term but often irrational in the short term. Yesterday, it just over-reacted irrationally, which is what the market does.

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