Wednesday, November 14, 2007

Article in Question: Stocks Soar on Hopes FED by Wal-Mart and 2 Banks

Stocks Soar on Hopes FED by Wal-Mart and 2 Banks

Statement: The broader Standard & Poor’s 500-stock index gained 2.91 percent, its best day since mid-September, picking up 41.87 points to close at 1,481.05.

I cannot refute that the Standard and Poor’s index (S & P) gained 2.91 percentage points – that can be measured! What I have a problem with is the needless association between the stock market (the S & P), the Federal Reserve (FED), and Wal-Mart. First, there is an economic reasoning behind claiming that investors react to announcements regarding FED policy. If the FED targets a lower federal funds rate, with the hopes that longer-term interest rates will follow (like mortgage or car loan rates), then discounted profits of firms in the S & P basket may rise (may being the operative word). This could cause investor demand to drive up the S & P index based on firm value. This is unlikely, since the FED made no such announcement yesterday.

Scond, trying to quantify the exact reason why an index comprised of 500 companies moved at all is difficult. I would be impressed if Michael Grynbaum, the author of the article, actually surveyed each portfolio manager and asked him/her the volume and value of S & P stocks that were traded. Then we could get an idea of why the index fluctuated. I can think of two reasons that Wal-Mart may drive up an index. First, the value of Wal-Mart shares rose by such an amount as to nominally drive the index up. Shares of Wal-Mart Stores (WMT) did rise, but by 6.12% in value. Likely, this is not the reason. Second, Wal-Mart may signal economic prosperity, and consumer expectations rise with the Wal-Mart reports; this causes the public to accumulate wealth, and the S & P rises. Again, likely not.

We have an article that really says nothing to the reader. Why doesn’t the New York Times simply quote the numbers and we can make our own inferences?

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