COLUMN-Why explanations of market moves are so often wrong: Fridson

By Marty Fridson

NEW YORK, July 30 (Reuters) - If you consider it good practice to consult more than one news source, you may have been confused by the reporting of the latest U.S. Consumer Price Index release. And the various interpretations of how that report affected stock prices might have truly left you scratching your head.

On July 15, 2025, the Bureau of Labor Statistics disclosed that CPI rose by 2.7% year-over-year in June. According to the Wall Street Journal, that increase “was in line with forecasts.”

Business Insider, on the other hand, used the following headline for its story on the CPI release: “Inflation surged more than expected in June.” And it added this result surpassed “the 2.6% expected.”

Anyone who read both papers was left wondering whether the 2.7% number did or did not exceed expectations.

On top of this there was confusion about the impact of the latest inflation print on financial markets.

The Wall Street Journal informed its readers the CPI report “struck a cautious note on Wall Street, weighing down stocks and lifting bond yields.” The Associated Press chimed in, “Most U.S. stocks slumped on Tuesday after the latest update on inflation hurt Wall Street’s hopes for lower interest rates.”

But if the inflation news simply confirmed what analysts had previously predicted, how could the CPI release explain the S&P 500’s 0.4% decline on July 15?

Even when reporters delved into data on the CPI’s subcomponents, they failed to turn up anything that constituted a disappointment versus expectations.

The Efficient Market Hypothesis suggests that stock prices at any given moment reflect all known information, which includes forecasts of economic indicators. By that reasoning, the inflation news should not have moved the market unless it represented new information, that is, unless it was a surprise.

GETTING TECHNICAL

Daily stock market updates seem to insist on identifying a fundamental cause for any given rise or fall, be it economic, political, geopolitical, or a natural disaster. Conspicuously absent from that list is something that makes up the life’s work of a large cadre of market professionals: technicals.

The core principle of technical analysis is that past price movements influence future price movements.

In other words, a one-day market move may sometimes have more to do with price momentum, a moving average or a resistance level than a specific legislative change or shift in gross domestic product.

This idea is anathema to most believers in efficient markets, but they should not be closed to the idea. The late Jim Simons used quantitatively advanced forms of technical analysis to compile a long-term return twice as high as Warren Buffett’s, according to data from the Wall Street Journal.

Or look at fund manager Bill Smead, who recently warned that investors should be wary of a market downturn not because of weak economic indicators, but instead because stocks had just hit a “line of death” or a “death cross,” which is when a 50-day moving average falls below the 200-day moving average.

That had not happened since the peak of the dotcom craze a quarter of a century earlier, which was followed by a major correction in 2000. When Business Insider reported on Smead’s warning, it suggested he might be worth listening to, considering Morningstar’s finding that the Smead Value Fund outperformed 96% of its peer funds over the preceding 15 years.

Of course, that does not mean one should take market technicians’ findings as definitive. After all, even some technicians themselves characterize their discipline as an art, rather than a science. And for every Simons and Smead, there is an underperforming technical analyst assigning too much value to a head-and-shoulders pattern.

LESSONS LEARNED

The lesson from all this is certainly not that market moves can never have a fundamental cause. For example, it is pretty clear what caused the 12% decline in the S&P 500 in the days following President Donald Trump’s "Liberation Day" tariff announcement.

But this example isn’t the norm, and one should therefore avoid accepting uncritically any statement claiming that one specific catalyst explains a market shift.

Understanding what really drives financial markets requires a change in mindset, a willingness to consider fundamental and technical factors and a refusal to accept the simplistic explanations found in most daily market recaps.

(The views expressed here are those of Marty Fridson, the publisher of Income Securities Advisor. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York.)

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