Whenever the market moves sharply, the media feel compelled to offer an explanation. Sometimes this is reasonable. For instance, a sudden increase in reported inflation is likely to be bad news for the market. But much of the time, there is no logical explanation for why prices have moved. Steve Ross, the seminal financial theorist, said it best before his untimely death in 2017. Professor Ross put it this way,
It is one thing not to be able to predict what asset returns will be since they will depend on news, and news, by definition, is information that has yet to be revealed. It is another, though, to observe the movement of prices and not know why they moved after the fact. I am particularly troubled that contemporaneous news seems to explain so little of the contemporaneous prices.
By contemporaneous news, Professor Ross had in mind the revelation of actual value relevant information such as announcement of last month’s inflation rate, not ex-post speculation or what biologist Stephen Jay Gould called “just so stories.” Examples of such just so stories include things like rising fear of inflation and panic selling.
When most of a company’s value is attributable to growth options the problem is compounded. Market values rest not on what a company is doing today, but what it could do in the future. As we have noted repeatedly in this blog, dreams of the future can evaporate for no apparent reason. The last six weeks have been a good reminder of that. Why they evaporated at this particular juncture is anybody’s guess.