November 22, 2011
In its top of the half hour news segment on morning edition (sorry, no link), Morning Edition told listeners that the stock market plunged on Monday because of the fallout from the failure of the supercommittee. Of course the stock market does not tell us why it moves the way it does. This was NPR’s assessment of the reason for the market’s movement.
NPR’s assessment suffers from two problems. First, the failure of the supercommittee was widely expected by the end of last week. This means that most of the impact should have been seen last week, not on Monday.
The other problem is that a failure to deal with the deficit, insofar as the deficit is viewed as a major problem, should most directly affect the bond market. In fact bonds went the way: prices rose and yields fell.
If there was concern that deficits would now become dangerously large as a result of the supercommittee’s failure, the bond market did the exact opposite of what would have been predicted. This suggests the need to find an alternative explanation for the drop in the stock market, like the growing probability that the euro will meltdown and produce another Lehman type freeze up. That would be very bad news for the economy and future corporate profits.
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