I recently posted about my puzzlement as to why the stock market indices gyrate wildly based on Trump’s utterances when we all know that he both lies and changes tack on what seems like whims. Several commenters had valuable insights and now this article from yesterday tries to explain what is going on.
Markets are rallying on a familiar bet: That President Donald Trump will, once again, back down. (It’s not called TACO Tuesday for nothing.)
The Dow, S&P 500 and the Nasdaq just had their best day since May 2025, roaring higher Tuesday in large part because of a report (and semi-confirmation) that the White House is considering an end to America’s involvement in the Iran war without reopening the Strait of Hormuz. CNN later confirmed Trump and his administration increasingly believe that they can’t promise to reopen the strait as a prerequisite to declaring an end to hostilities with Iran.
…Oil trades on a global market, and US crude and gas prices will remain high as long as the Strait of Hormuz is closed – no matter how much “drill, baby, drill” President Donald Trump proclaims.
You’d think that’d be bad news for markets.
Nevertheless, the Dow rose by more than 1,000 points, or 2.4% Tuesday. The S&P 500 was up 2.8%; and the Nasdaq, which had entered a correction last week, was 3.8% higher.
…The reason: FOMO from a TACO, the Wall Street acronym “Trump Always Chickens Out.” Trump has repeatedly reversed course on some of his most economically significant policies and proposals, giving markets whiplash and leaving traders with significant losses if they had the wrong end of a bet.
“They’re waking up every morning, going to sleep every night, rubbing their hands together, thinking, ‘This is great. All I got to do is be on the right end of the giant roller coaster, and everything’s going to be fine,’” said Dan Alpert, managing partner of Westwood Capital.
In other words: Even if markets don’t believe a word of what Trump says, it’s better to make money by giving him the benefit of the doubt than to lose money while ignoring him. Traders aren’t just worried about a TACO – they’re trying to take advantage of the situation.
…“(Today’s market move) is not justified by the news,” said Art Hogan, chief market strategist for B. Riley Financial. “This is the market telling you it was coiled up for any kind of good news.”
The article seems to be saying that if Trump says something (like the war will end soon) that looks like it would be positive news, traders will jump in to buy not because they believe him but because they think others will buy based on the news thus driving the market up. And the opposite happens when Trump says that he is going to expand the bombing, driving the market down.
I can’t say that I see this as a real ‘explanation’. It seems like an attempt to give a rationale to what is inherently irrational. This is why I do not engage in stock trading, just like I do not gamble. You will always lose to those who either have inside information or have information even slightly ahead of you. If you follow the news and make decisions based on what you think is going to affect the general economy or a particular sector, you are already too late to the game.
Well, perhaps to an extent traders may see an opportunity to make money on the naiveté of other traders, but I believe, like Mano, that this is too rational an explanation. I think that most of this is explained by traders all being fearful lemmings who complusively rush to follow what they think everyone else is doing (because, if everyone is doing it, it must be good), and also because traders *want* the war to end soon, so that the global economy will be more normal. They have a strong incentive for the market to go up, so they are acting on their wishes, which makes it go up.
You are right that “the market” is inherently irrational, Mano: it depends wholly on what rich people are feeling, and not on any rational measures. The traders are indulging in wishful thinking and following the crowd, as they always do.
Honestly, I think that one could succeed at stock trading if you just did the opposite of what “the market” is doing. They’re doing the irrational thing, so the opposite is the rational thing.
So… the value of a company isn’t, after all, its inherent capabilities and future prospects, but turns out to be the mean of the squares of an inherently volatile betting market which puts as much value on the perceived mood of an inherently volatile old man with dementia and which side of the bed he seemed to alight that morning.
I wish it weren’t true,
Off-topic.
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Artemis II:
Two hours to launch.
Just wants to make sure you do not miss it. Last time was 54 years ago.
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I watched Apollo 8 take off on Swedish Television december 1968. That mission was more ambitious, actually entering lunar orbit. This mission rather mimics the Soviet Zond missions, travelling on an ellipse behind the moon.
-And now back to the original topic!
This may be overly simplistic, but brokers make money on transactions, either buying or selling. They will use any minute reason to make a recommendation to buy or sell. They don’t care as long as they get their commission.
Oops Mano, this one overwrote your last post…
“Interesting” comments here.
but s…..
Oops, sorry!
I’ve put the original post back.
Off-topic comment again.
-The speech last night is a cornucopia of material for comedy and satire. Did you know we are living in a time loop where past presidents are told what to do? DJT: “…..and never should past presidents.”
.
(I mention this to cheer you up in an otherwise bleak time. Now back to the stock market)
And then Trump goes and opens his stupid mouth again, and… Markets crash, oil surges after Trump speech
One possible reason for the stock market gyrations that I haven’t seen mentioned on TV news is insider trading and Trump using his back-and-forth pronouncements to manipulate the market. It’s just possible that he knows that he’ll lose in November and wants to make as much money for himself and his cronies as he can before then.
A bit over a week ago, Robert Reich, on his substack, reported that there have been trading spikes minutes before several of Trump’s pronoucements. Was there any short selling going on just before his speech last night? Is anybody reporting on that?
It’s definitely happening, but I don’t think it’s anywhere near big enough to explain even 1% of the movements we’re seeing. Insiders have made a few hundred million here and there in advance of key pronouncements, but last night’s speech triggered half a trillion in lost market cap after the fact. People with inside information are profiting off the movements, sure, but they can’t cause them.
I’ve been kind of thinking it’s just children all around. On the one hand you have Trump who acts like a poorly behaved toddler. On the other you have a bunch of people looking for stock market fairy tales. Not the nice modern kind either, the older style tales with blood, death, and starvation. But they don’t care about any of that, they just want to be sitting on a pot of gold at the end.
Stock prices have diverged quite a bit from actual value. And I think that’s why the markets need things like the TACO story to tell themselves even as that undercuts what Trump wants out of each situation and might cause him to act even more erratically. Without the stories though, traders just have a bunch of bad news to deal with. They’d rather make up stories about values fluctuation wildly and causing stampedes as they all try to make the most of it. They’re telling themselves that next time they’ll be at the coveted front edge of that stampede.
@garnetstar @1
For a brief period ,almost a decade ago , I did buy some stuff -- and it turns out the market does do the opposite of what i do (So Im rational i guess!) -- but I cant call it succeeding. The problem appears to be the sequencing. -- You buy something , the price goes down next day , you sell it , the price goes up.
EigenSprocketUK wrote #2,
I’m pretty certain from your tone that you knew that already. But it is worth reminding people how we got here.
That de-coupling of company value from stock value occurred in the 1980’s under Reagan. There were a number of things which started at that time which changed the incentives of people who had money to invest.
1. The top income tax bracket dropped from the 70% range to the 30% range. (Nixon dropped it from the 90% range to the 70% range.)
2. Capital gains were taxed at a lower rate than other income.
3. Companies moved from fixed-benefit retirement plans (i.e. pensions), to 401(k) plans. This change forced a lot of people who otherwise would have avoided the market to put their retirement savings into it.
4. With all the money from the 401(k) plans entering the market, the money had to go somewhere, that money HAD to be used to purchase stocks (or other market instruments like mutual funds), which de-coupled stock value from the actual value of a company asset.
Put these all together, and the incentives for investors have nothing to do with company value, but everything to do with trying to out-guess the market and buy low/sell high. In my opinion, If you want to bring the stock market back to reality several things need to happen.
1. Bring back a 90% top tax bracket. Set it to 100 times the median income, so it can increase as the median income increases.
2. Tax capital gains as twice income (i.e. if you purchase stock at $40K and sell at $50K, your income is figured as making $20K rather than $10K. This sounds like a real penalty, but it will significantly reduce the number of transactions and the volatility of the market. Microtransactions may need to be managed separately, but there is already some talk about doing so.
3. To offset taxing capital gains at a higher rate, tax dividend distributions as one-half income. If you get $10K from dividends, it only counts as $5K for the purposes of calculating income. There are a huge number of benefits of doing this. First, dividends mainly come from company profits. If a company is run poorly or has had all it’s assets sold off, it will eventually show up in reduced dividends. That condition will not show up when stock traders are manipulating the stock. It also incentivizes dividend payments, the board of directors will want to get as much of their income in the form of dividends because it makes it harder to reach that 90% tax bracket. But it also means that someone who owns a fraction of what each board member owns as far as stock shares, will also get some income from these stocks, and income which will be taxed at a lower rate. If nothing else from my list is done, making this change alone will help everyone who has a 401(k).
Finally, let’s have a quick thought experiment about what would happen if Social Security was moved to a market-based system. First, trillions of dollars would enter the market. This will push the price of all stocks up. Then everyone who already had money in the market would take their profits. Most of those trillions would leave the market almost immediately. Stocks will drop back to close to their previous level, probably 10%-15% higher, but they would have spiked to 200% of value when the initial trillions of dollars entered the market. It would probably be the biggest government giveaway of public money to the wealthy in history. The people who were forced to move their SS to the market would also have been forced to buy shares at that 200% of value, and when they need the money they will find that they can only sell those shares at a loss. Not a wise plan, the only people who benefit are those who already wealthy.
There have been stories for quite awhile about big companies that trade stocks buying very low latency network connections to stock exchanges. I believe most of them also offer services that buy stocks for you but they do not have a fiduciary responsibility to you (ie, legally they do not have to put your interests first and can shamelessly profit off of you). They setup programs that buy and sell stocks automatically when they reach certain values.
What does this mean? Well I’m not an expert in stock trading but this is my understanding of it.
In a practical sense it’s a bit like a setup where you go to their offices and tell them to buy stocks for you. They send a trader to the exchange who does the actual transaction and comes back to tell you what you bought and how much. So far, not much different than sending someone on an errand to buy something for you from a store. Regular “pick up some milk on the way home” kind of stuff.
But that’s not the end of it. With stocks, buying raises the price when the next sale comes in. Selling lowers the price for the next sale. Supply and demand in an immediately reactive way. So what happens if the trader you send to the exchange in our example buys stock for themselves before they buy some for you? Your price goes up and you spend more for the same stocks.
Since that trader is always around the markets when they see someone else make a big sale or purchase they can’t interrupt it the way they could if it was made through their trading firm. But they can be first in line right after that to take advantage of the new price point. That’s what the low latency network connection does -- it lets them effectively cut in line. The grocery analogy here would be if you wanted spaghetti sauce and the store had several brands of it at different price points. It’s all the same to you, but someone else buys a bunch of the generic before you get to it and there’s only a few left. That’s when someone cuts in front of you and grabs the last of the lower priced options leaving you with only the most expensive options.
I live near Chicago, which had a stock exchange until last year. As recently as a few years ago I was seeing job postings that made it clear something like this practice was still in use so I don’t think it’s a fad that went away.
When it comes to normal people we’re generally in one of two camps: you either make long term decisions about stock purchases and have a financial advisor make purchases and sales for you. This is slow and may not even happen the same day. Or you do the day trading thing and camp out on an app from one of those companies that doesn’t have a fiduciary responsibility to you. In theory if your purchase is big enough to be worth paying the taxes they could actually buy a lot for themselves, raising the price right before they buy for you. And then sell it all immediately afterward, lowering the price again. So the price is artificially high only when you’re paying it.
So overall I think it’s still possible to succeed at stock trading and it might even be possible to do so without being rich to start with. One can choose a member of Congress for example and keep a close eye on when they buy and sell because quite a few of them seem positively visionary when it comes to stocks that might be affected by congressional proceedings (sarcasm). The whole game is run by thieves for thieves and it’s built on thievery and magic numbers that are more loosely related to the actual value of the thing you’re buying than advertised. So whatever you do with it go in with eyes open and ready to deal with bad faith actors. Because there’s a lot of people that just see you as a mark.