The Stock Market As Information Processor; News and Events Moving The Market This Week

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The stock market is the most amazing thing.  Everyday and throughout the course of a trading day new information comes out and you can see, immediately, the market processing that information via changes in securities prices. 

A company reports earnings after the bell and when the market opens the next day the new information is immediately reflected in the trading of that stock.  A news article comes out in a major publication and the relationship of various companies to the information and analysis, as understood by market participants, is immediately processed in their stock prices when the market opens.  A piece of news come out during the trading day and the market immediately responds. 

It’s a perfect, and instantaneous, example of Hayek’s argument in “The Use of Knowledge In Society” (American Economic Review, September 1945) – one of, if not the, best economics essay I’ve ever read.


I always like to understand what’s moving the markets.  So let’s review some significant pieces of news that have moved the market this week (S&P Mon-Wed Chart).

Mon 7/30, 12:30pm EST: S&P upgrades Morgan Stanley’s credit rating from A+ to AA- and it’s outlook from “stable” to “positive”. 

The market takes this as a sign of confidence in investment banks weathering the current storm in credit markets and the financials rally (S&P Financials Mon July 30 Chart)- taking the whole market with them.

Tue 7/31, 2:00pm EST: After warning investors that pressure from lenders may force it to liquidate its assets, American Home Loan Mortgage re-opens for trading for the first time for the week at 2:00pm EST. 

It promptly gets hammered, losing about 90% of its value within a half hour – and takes the whole market down with it (subscription required).

Wed 8/1, Premarket: The Wall Street Journal runs a story on the front page of it’s “Money & Investing” section titled “Are Big Insurers Protected From The Subprime Fallout?” (subscription required). 

The article notes that insurance companies make money by selling insurance products, investing the premiums, and hoping to make a profit from the difference between what they earn on their investments and what they have to pay out in claims.  Recent problems in the credit markets are therefore paramount to their business.

The KBW Insurance Company ETF (KIE) sells off by 2.25% in the first hour and a half of trading (chart) before recovering a bit.

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