When “Widespread Fear” is a better story line than a fact

kevin | Decision Making | Thursday, July 24th, 2008

Can anyone explain this to me. Markets, at least in theory, are supposed to represent all of what’s known about a stock discounted to a present value. So how is it that every major news outlet had a lead like this one from the NYT?

Widespread fear about the financial sector brought a dramatic end to the recent stock rally, as investors scrambled to take profits from bank shares and sent the Dow Jones industrials down more than 280 points, its worst loss in a month.

Investors are worried that the worst of the tight credit market still lies ahead. The nation’s banks have struggled to escape the cascading effects of paralysis in the debt markets and the decline in home values. Sales of previously owned homes declined in June at nearly double the rate that economists had expected, according to a report on Thursday.

The sell-off in financial shares brought down the broader market, with the Standard & Poor’s 500-stock index finishing down 2.3 percent. The Nasdaq composite index slipped 2 percent. All the major indexes headed downward at the opening bell and never recovered.

So the implication here is that there was some vast new treasure trove of information today that was beyond the ken of the smartest market players in the game. Yesterday that were feeling great about financial services firms, and today they’re racing for the doors.

A better explanation is this . . .

“We’ve had such a strong run especially in the financials,” Ryan Larson, a trader at Voyageur Asset Management, said. “A lot of people are taking money off the table.”

The problem here is that “taking money off the table” isn’t nearly as sexy sounding as shock, panic, and “widespread fear.”