Financial Reporting Follies? Not in this case...

Posted by: Ben Steverman on July 18, 2008

Sometimes it’s hard to know why the stock market rose or fell in a given day. Yesterday, it wasn’t. The main reasons for Thursday’s rally were a drop in oil prices (prices had fallen $15 in three days) and a good earnings report from JPMorgan Chase (JPM).

However, Kevin Drum, the well-respected blogger at Washington Monthly, criticizes a New York Times story on the market action, suggesting its “explanation has been created out of whole cloth.”

Drum writes:

Here’s the story they invented to explain it: (a) there’s a widespread belief that the global economy is tanking, thus (b) reducing the demand for oil and (c) driving down oil prices. Wall Street, (d) seeing plummeting oil prices, (e) is elated and (f) drives stock prices up.

If you read the Times story, you can see that Drum is mischaracterizing, or maybe misunderstanding, its explanation of the day’s events.

The stock market reacts to what is new. Worries about a global slowdown — not, please note, a global recession — have been with us for weeks if not months. In fact, this is one reason why high oil prices are such a concern for investors, because they might slow world economic growth. The question, however, was whether a reduction in growth rates would affect oil prices.

The past few days are the first signs that this slowdown might actually be reducing demand for energy. That’s undeniably a good thing for the world’s stock markets. Along with the JPMorgan news, which Drum doesn’t mention.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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