How the Markets Need Thelma and Louise

by The Wall Street Geek on November 19, 2012 · 4 comments

thelma and louise hands How the Markets Need Thelma and Louise

At the end of the 1991 movie “Thelma and Louise”, the two heroes look across at each other, hold hands, and speed their 1966 Thunderbird off a cliff.

It’s probably not the best movie analogy when talking about Washington.  But focus in on the fact that two very different people made a fast decision and committed to it.

It’s the opposite of Washington politics.  According to opencongress.org, House bills sat waiting for Senate review on average for 10 months in 2010.

Both houses hold and deliberate bills for a reason.  It’s actually by design.  After all, bills don’t come with a 30-day money back guarantee.

But looking at the fiscal cliff negotiations specifically, however, how big of an impact are lengthy negotiations having on the stock market?

Below is a chart showing normalized weekly web search volume for news stories mentioning “fiscal cliff” this year (in blue, normalized by the highest value) vs. the weekly DJIA % change.  The assumptions are:

  • Web search volume has a decent correlation to actual news stories about the fiscal cliff, and
  • A significant share of the “fiscal cliff” searches relate to federal-level fiscal cliff news
Fiscal Cliff How the Markets Need Thelma and Louise

If I wanted to do a more exact comparison, I’d take Reuters’ news API and check it against the S&P 500 tick-by-tick.  The thought of doing that for a personal blog article gives me a headache.

Nevertheless, looking deeper and attempting to calculate a Pearson correlation shows that the Dow is actually mildly to moderately correlated to search volume (and, by assumption, news) about the fiscal cliff.

The good news?  Congress and the President appear to understand that investors need to see movement on settling fiscal cliff issues.  The bad news for investors?  Congress and the President appear to be spending a significant amount of time on an issue that appears to just moderately affect the market.

It’s one of many issues that investors are watching.  It’s highly encouraging to see movement on any issue, but resolving this issue specifically won’t cage the Kraken that got released in the market after Election Day.

While it would be a hoot to see the President and Speaker Boehner hold hands and drive into the sunset, as an investor I’d still have a number of other questions on my list – including hearing concrete fiscal plans that could help end this secular bear market.

Show us action on more issues, elected officials.  Because brains’ll only get you so far, and luck eventually runs out.

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Price CapitalAfter turning $1100 into $7015 in the stock market right out of college, Michelle worked 15 years on Wall Street at Morgan Stanley, Citigroup and Goldman Sachs. She wrote "How to Buy Stocks Online", and is a fee only financial advisor providing investment help in New York City.


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