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Rekenthaler Report

The Market's Crazy, Not You

The true story is simply that Nasdaq’s decline wasn’t rational.

Financial Follies 1
To my surprise, some commentators have attempted to put a rational spin on the Nasdaq's early-April follies. The market’s drop, they say, was a justified response to the announcement that settlement talks between Microsoft (MSFT) and the Justice Department had failed and that Judge Thomas Penfield Jackson had declared Microsoft a monopoly. By this account, savvy technology investors soon realized that no matter what their beliefs about Microsoft, they should mourn its problems, because there but for the grace of God went their companies. An unfettered, regulatory-happy government was now on the loose.

Not quite. Look at the chronology. From Monday’s opening until midday Tuesday, Nasdaq shed nearly 20% of its value, presumably in response to these events. (Since a settlement was far from certain and Jackson’s beliefs have been widely known for months, such a reaction would seem extreme, but let’s preserve the fiction.) Okay, fine. Then why, pray tell, did it gain nearly every point back over the next three and a half days, so that it finished the week virtually where it started? What news caused this dramatic reversal of fortune?