Thursday, Oct. 13, was one of the strangest days for asset markets in recent memory. Stocks, bonds and bitcoin all closed flat to up despite gloomy inflation news that should have triggered a broad sell-off. It’s an important moment for reflection on the all-too-human strangeness of markets – and the temptation and risk of explaining that strangeness with simplified narratives.
The day began with the release of new U.S. inflation numbers, which among other data showed that the consumer price index (CPI) rose 0.4% in September. That’s an acceleration from August, when month-over-month inflation was 0.1%, which had raised hopes the U.S. Federal Reserve had bent the curve on inflation.
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Thursday’s inflation data dashed those hopes. The immediate, sensible implication was that the Fed would continue raising interest rates aggressively. That would make the outlook for stocks and crypto worse while pushing up bond yields. All of those things happened after the inflation news.
For about an hour. And then things got weird.
Starting at around 9:30 a.m. ET, stocks and crypto bounced sharply. Bitcoin rocketed up 7.8% from a low of $18,372 to end Thursday at just over $19,800. At almost the exact same time, the Dow Jones Industrial Average (DJIA) found a bottom at $28,709, then proceeded to rip up 4.6% to $30,038 by the close. Bond prices also dipped before recovering though, unlike stocks and crypto, bonds didn’t recover all of their early losses.
There’s little case to be made that anything more important than inflation data happened Thursday. And everything else is looking fairly gloomy, with the new U.K. government still a basket case and, at best, a faint light at the end of the Russia-Ukraine tunnel.
So a rational person can only look at yesterday’s rally and ask: What the &#$%?
For a start, your first mistake was in being rational. Financial journalists across the board had a rare and appropriate moment of humility Thursday, with many admitting quite simply that what had happened couldn’t be straightforwardly explained.
Even fairly compelling attempts took on a note of absurdism. Sam Ro, editor of Tker.co, had both the funniest and the most intriguing analysis.
Ro is simultaneously joking and serious. The Fed’s monetary policy has come to dominate asset price predictions, turning asset markets into a giant game of second-guessing ChairmanJerome Powell. That often leads asset prices to perform inversely to their fundamentals in the short term. It was common even before the inflation fight, for instance, for a strong jobs report to sink the stock market. That’s because while higher employment is a sign of a healthy economy, it also portends rising interest rates that are bad for asset prices.
This was basically paralleled in the initial response to the CPI: Hot inflation numbers signaled the economy is still going strong, but also that the Fed will be more hawkish on raising rates. That’s why assets would logically sink.
Ro’s modest proposal is that markets merely added a layer of forward reflexivity. If you’re moving prices down today because you expect a tougher rate hike next month, does it make any less sense to move prices up because the tougher rate hike next month will lead to a recession and lower rates next year? Why, it’s so crazy it just might work.
Or maybe it’s just plain crazy. Ro’s hypothesis is fundamentally unfalsifiable – you can’t actually poll everyone who drove prices up Thursday, and even if you could many of them wouldn’t even have clear reasoning for their own moves.
Part of Ro’s implied joke is that all financial analysis is about telling similarly reductive just-so stories. People do stuff for all kinds of reasons, including bad reasons, and markets are ultimately made up of people. A smart investor never forgets just how unpredictable, illogical and even absurd that can make them.