Is the Stock Market Reading the Tea Leaves?

Since September 1, the stock market has been on an upward tear. This is happening when the economic news (jobs numbers that sucked on Friday, reports of consumer behavior spending shutting down, etc.) continues to suggest nothing but doom and gloom ahead. What is going on in the markets?

Stock markets, while they trade on news that comes in from publicly traded businesses, political and economic events, government intrusion and spending patterns (including levels of public debt), currency exchange rates and, among many other reasons, perceptions of inflation and other pricing indicia, are essentially forward looking. The markets price all available information that is available to them into literally millions of competing worldviews about the future. Some of these worldviews are optimistic, some are pessimistic. Since Labor Day, the worldviews are turning optimistic.

What’s impacting the market in such a way that we’ve seen a roughly 10% increase in the value of the Dow Jones Industrial 30? This is an astonishing increase in a month (and, for that matter, a 10% increase in any twelve month period exceeds the long term average rate of return in the stock market and is actually understating total returns because it excludes dividends), particularly after a summer of discontent and decline, marked by substantial volatility.

Here’s another chart. This is the Intrade chart of the political market’s belief that the GOP will wrest control of the House of  Representatives in the coming November elections. The corresponding chart for control of the Senate shows a similar trend.