Risingcases,highCPIandahabittoattribute

After the rally in the earlier part of the week, stock markets are retreating some of the gains with Dow, Hang Seng, Nikkei, Shanghai Comp all down close to percentage point. The financial press is quick to attribute the current fall to rise in pandemic cases in the US and the forecasted loss in GDP due to the same. The US reported more than a 140k new cases on Thursday. It needs to be noted that since the 4^th of November the new case number is north of 100k every day.

However, readers would do well to question this habit of attributing a reason to every move in the markets. Sometimes it can also be a case of force fitting. As there are multiple news items hitting the market, sometimes it just helps to pump up the most plausible narrative. Instead of the argument “corona cases up, market falls”, the reasoning “market falls, corona case data gets the limelight” is equally true. The point being that till the time a very significant move happens like a 4-5% up or down which can be traced back to specific news like election results, vaccine news etc. the rest of everything is mostly a narrative of concoction.

Author Rolf Dobelli in his book “The art of thinking clearly” describes this as a cognitive bias called narrative fallacy. Simply stated it is the all-pervasive habit to attribute a linear and discernible cause and effect chain to our knowledge of the past. The constant yearning to make sense, when something happens, we need to know why it happened. Though this quest is mostly harmless but can result in a problem if we derive wrong conclusions which impact our future decisions.

Moving on, another data point which released in the US yesterday was the initial jobless claims number. The number of people claiming the unemployment benefits for the first time fell to 709k last week, this is the lowest number since March when the pandemic started. But the expectation is that as the next wave of pandemic induced lockdowns happen, discretionary services like restaurants and travel will be hit again and this jobless claim number will start rising in the coming weeks. The second stimulus discussions have been further scuttled due to the impasse on election results.

Domestically we had a heavy action day yesterday with govt announcing the third instalment of a stimulus package. The package included both short-term and long-term measures to provide targeted relief to stressed sectors. In the post market hours CPI data (for October) and IIP data (for September) were released. CPI came in at 7.61% against the expectation of 7.3% driven primarily by food inflation. Food inflation was at 11.07% YOY. IIP was seen in positive territory after many months. The effect on the G sec yields was not much though as the 10-year yield still trade at 5.90. Otherwise any rise we could have “attributed” it to is the CPI data.