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Why did the market fall (or rise) today?

This is arguably the most popular question, and one that gets asked every day. But rarely does anyone say, “I don’t know.” That would signify lack of expertise. Instead we get one of several common explanations:

• Foreign investors are selling
• Valuations are high
• Tensions increase in the Gulf
• Oil prices rose
• Trump tweeted
• The Fed is expected to raise interest rates
• AI worries dragged down IT heavyweights
• IPO frenzy has pulled out money from secondary markets

I’m sure you can find many more.

Just because these events coincided with a market move does not mean they caused it. Nor do we know how much they contributed.

For example, let’s take FII selling. Over an extended period, the withdrawal of money by foreign investors can affect our market’s performance (especially in large caps), but on any particular day, the correlation may not hold. There have been many instances where FIIs sold, and markets went up. Of course, on those days, the media will forget about FIIs and focus on some other story.

Another narrative doing the rounds currently is that the wave of IPOs are sucking money out of secondary markets. Again, very plausible. But there are periods (or days) where large IPOs coincided with market rallies. And on those days, IPOs disappear from the explanations.

Notice how explanations are designed to fit the market action.

A company announces an acquisition and the stock rises. Analysts go out of their way to explain how the deal will create synergies. If the stock falls, then they will say that the price paid was too high. Both are plausible and may be true, but neither can be established from one day’s market action.

If a company appoints a new CEO and the share price moves up that day, this is attributed to the appointment. But the entire sector or market may actually have moved up for a different set of reasons.

These explanations are plausible because they often contain a grain of truth. For instance, oil price increases. This can affect our balance of payments, increase inflation and weaken the Rupee. Companies may suffer rising input costs or declining demand. A sustained increase is cause for concern, but a 2% increase in crude yesterday doesn’t automatically explain a 1% fall in the Sensex today.

The truth is we mostly don’t know why the market (or stock) goes up or down in the short run. Markets are incredibly complex, and supply and demand for stocks is influenced by innumerable factors, many of which may not even be visible today.

We have a liking for simple explanations (and certainty). And the media and experts are only too happy to provide these.  The problem is not that these explanations will be stupid, but that they will be all too plausible.

The truth is that we’re uncomfortable with the idea that we don’t know why something happened, and nor does anybody else.

But remember, we don’t need to know why the market moved yesterday to pick what we should own for the next five years.