Political  Calculations
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Over the past several weeks, we've identified three potential wild cards that could affect stock prices in a positive way in the margin of our favorite chart:

  • The Fed could amp up its latest QE program.
  • Investors might shift their focus to 2014-Q1 in setting stock prices.
  • "Noise" events.

In just the last week, we've seen evidence that all three of these wild card factors may be coming into play. Let's take them on in reverse order:

What we call a "noise event" is the stock market's response to speculative factors, which are most often associated with new information becoming known to investors. Things like jobs reports, economic data releases, and even political events are all things that can and do affect stock prices on top of the signal sent by the main driver of stock prices: the sustainable portion of expected future earnings (a.k.a. dividends). Noise is always present in the stock market, but the extent to which it present can vary greatly over time, and one of its main characteristics of a noise or news-driven event is that the response of investors to it will end. It is only ever a question of when.

The apparent surge of stock prices on Friday, 3 May 2013 in response to a better-than-expected U.S. employment situation report would qualify as a noise event. Reuters reports:

The Dow and S&P 500 advanced to all-time closing highs on Friday, with major indexes jumping 1 percent after an unexpectedly strong April jobs report eased concerns about an economic slowdown.

But what if there is something more fundamental underlying the stock market's Friday rally?

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Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

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