The Hindu Business Line : <I>Rationalising events </I>

There was an e-mail sometime back that showed how absurd stock market reports could get. The e-mail carried an article from a newspaper that said that equity prices moved up because of expectations that inflation could decline. The next day, the market report in the same newspaper stated that equity prices went down because of fear that inflation could decline! Of course, students of finance may be able to defend both the statements with cold logic. Take the pessimists. Declining inflation could be due to a fall in national consumption. If this were true, it could mean a slowing down of the economy, which could lead to lower corporate profitability. For the optimists, declining inflation could mean lower costs. This could lead to higher cash inflow, meaning higher corporate profitability!

The point is that even if we know that inflation is indeed declining, it is very difficult to judge how the markets will react. That is, perhaps, why many successful money managers claim that they read facts and not opinion in the newspapers.But why do newspapers attribute reasons for market movements? The reason is that all of us are interested in knowing why things happen — in the market or in life. As Fredrich Nietzsche philosophised, " To trace something unknown back to something known is alleviating, soothing, gratifying, and gives moreover a feeling of power... . any explanation is better than none... the cause-creating drive is thus conditioned and excited by the feeling of fear... "

It is our desire to know the reasons for every event that drives newspapers to attribute causes for daily market movements. Criticising newspapers may not be appropriate. As Pogo (Walt Kelly) said, " I have found the enemy and it is us."

(The author is based in Ontario, Canada)

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