Stock Market: Is Wall Street Irrational?

(Drivebycuriosity) - Last week Wall Street showed how irrational she can be. On Friday the S&P 500, the gauge of the US stock market, dropped suddenly 2.5%, the sharpest sell-off since the Brexit scare in June. "The summer of calm gave way to chaos," commented Barron´s (barrons). The selling was caused by the fear that the Fed could hike their interest rates  soon, say the pundits.

This sell-off does make no sense nor did the Brexit selling spree and the panic selling in January & February.  Brexit didn`t harm the British economy, the current economy data show that the British economy stays resilient. No wonder that the stock market erased the dent in few days. Neither was the January/February selling panic - caused by fears of deflation, negative interest rates, crashing oil prices and an allegedly tanking Chinese economy - justified. These selling sprees were irrational and fostered by the herding behavior of the hedge funds (and those who follow them). Those speculators buy and sell the same stocks, at the same time, and track each other's investment strategies.

I suppose that last week´s stock market response was irrational as well. The fears from January & February have disappeared. Now the market doesn´t fear falling interest rates, now she fears quite the opposite. One fear has displaced the other.  Yes, the Fed may hike soon, so what. The Fed only will hike when she believes that the global economy is getting better, and the next rate hike will be modest, maybe just plus 0.25 percent points. So interest rates will stay abnormal low. History shows that such small interest rates moves don´t slow the economy.