Thursday, April 4, 2013

North Korea Didn't Shoot Down U.S. Stock Markets Yesterday, Despite Popular Belief

Earlier, I had written a post about how some media outlets largely overstated yesterday's stock market decline. In addition to describing the magnitude of the decline incorrectly, I think many media outlets got the cause of the decline incorrect as well.

There were more than a few headlines circulating yesterday that the stock market fell because it was "spooked by the news out of North Korea". This is not likely to be true. A trained eye can cite two specific reasons, one being more important than the other.

Most importantly, if the stock market was truly spooked for that reason, the South Korean stock market index (known as the Kospi) would have been down substantially more than U.S. markets. While the S&P 500 was down -1.0%, the Kospi was only down -0.17%. As I write this post today, the Kospi is actually up. When a stock index of a country that actually borders an enemy that is threatening a nuclear missile attack barely goes down, especially by comparision to U.S. stock market indicies, then you know that U.S. market participants were influenced by something other than the threat.

The second reason is that the volume of shares traded when the market is actually "spooked" would be much higher than average. While it was a bit higher than the recent three month average, it was by no means significantly higher.

The untrained observer will commonly take the most notable headline they see for the day, determine its connotation as being either good or bad, and if the actual market direction is in concert with the connotation, they draw the conclusion of causation. It's an amateur mistake that seemingly happens quite frequently in the media.

So, when you see a financial headline that suggests a causation for specific market activity, make sure all the available data is congruent and supportive of the causation. If it's not, the author's headline might be completely wrong.

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