November 6th, 2008

A Brief Primer on the Markets

Well, the Dow Jones has just dropped 10% across the last two days following the election. I heard the financial reporter on WBBM-AM this morning saying that it was because people thought that Obama would not be in office soon enough to implement his economic plan. Now, that's fascinating logic. I could equally easily say that it's because the markets recognize that Obama will soon be in office to implement his economic plan which has included things like raising the capital gains tax rate in the interest of fairness, regardless of its impact on government revenues. (That may or may not be part of his economic plan now, as these things are subject to change.)

But that would be equally specious reasoning. In the short run, it's not necessarily easy to figure out why the market is doing a particular thing, only that it is doing it and that it reflects some belief that the value of the shares traded is either higher or lower than it was before. And you need to recognize that there is a buyer and a seller in each of these transactions, so for everyone who is deciding to sell a share at a given price, there's someone else who is willing to buy it.
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