What Does The Stock Market "Know?"

According to the experts in the financial industry the stock market is an powerful resource allocator that discounts that discounts future events.  Whether it goes up or down it is, allegedly, always predicting something.  Thus, like modern day Delphic Oracle, we are supposed to decipher the prophesies about the future contained in the daily fluctuations of the Dow Jones Index.  Also, like its ancient Greek counterpart, the Dow Jones Index is never short (no pun intended) of willing interpreters to guide the general public through the intricate language of the prophet.

An alternative theory, held by a tiny dissident minority, is that the stock market is nothing but the sum of beliefs held by those willing to buy and sell stocks.  In other words, if you believe stock X will go up, you buy it and if you think it will go down you sell it.   The consensus can be right or wrong like in any human endeavor.

Although we see many examples of this on a daily basis, we'd like to point out the behaviour of the American stock market yesterday (November 8th, 2011) and today in the face of the "Italian crisis" (the name is totally arbitrary).

The market was down yesterday for most of the day.  An unbiased observer, looking at Italian bonds trading with a yield of 6.50% would have concluded that: (1) nobody, save for the ECB, wants to lend money to Italy, (2) this is bad for the markets/world economy, (3) the stock market reflects this.  However, as European markets began to close the US market began to firm up, ending the day in positive territory.   As the interpreters were quick to point out (here is an example from CNN Money, other publications said the same)

Stocks had been seesawing Tuesday as the fate of Italy's prime minister hung in the balance, but they moved firmly higher after the Italian president's office confirmed that Berlusconi will step down. He is expected to resign following the approval of a new budget law that is currently making its way through parliament.

 Today the markets opened down with the news that Italian bonds were trading lower (i.e. higher yields) which would have led and unbiased observer to conclude that: (1) nobody, save for the ECB, wants to lend money to Italy, (2) this is bad for the markets/world economy, (3) the stock market reflects this.

Except that the interpreters of the Dow Jones Oracle already said Berlusconi's resignation was an issue.  So they had to come up with something creative and cryptic to fit the bill.  This is what Bloomberg said:

...and Silvio Berlusconi’s offer to resign as prime minister triggered questions about who will lead Italy out of its crisis.

 So now Berlusconi's resignation is bad for the stock market.

Amazingly they call this information.  If it was on any other topic, this kind of nonsense would not be tolerated by any reasonable reader.   Go figure.