U.S. were down today, as the S&P 500 (^GSPC 1.00%) lost 1%, while the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.48%) fell 0.8%.
The VIX Index (^VIX -4.07%), Wall Street's fear gauge, shot up 10.6 to close at 17.07. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)
The Japan factor
"Wall St. slides as BOJ [Bank of Japan] move rattles trading" is the headline of today's market wrap-up article from Reuters. Have we really reached such depths that U.S. equity indexes are now sensitive not only to U.S. monetary policy but to Japan's as well? Unfortunately, it appears so.
Boiling down a day's results to a single factor is always a perilous exercise, to be sure, but I think Reuters' explanation is entirely plausible in this environment. There is essentially no direct impact on U.S. equity values of today's decision by the Bank of Japan not to alter its monetary policy, but it has an impact on sentiment, as a psychological reminder that there are limits to central banks' action. Limits in terms of what central bankers are willing to do and, ultimately, what they can do.
Furthermore, Japan now serves as an experiment open to all observers on the behavior of asset prices at the extremes of monetary policy. The result: higher stock prices, yes, but also higher volatility:
Facebook faces the music
There was one topic Facebook (META 2.35%) CEO Mark Zuckerberg could not avoid at the company's first shareholding meeting since going public last May, that of the share price, which remains down more than a third compared to its first day closing price. Zuckerberg himself acknowledged that it became "a theme" during the meeting.
Zuckerberg countered that, while disappointed with the stock's performance, nothing "has made me really think that the fundamental strategy is wrong or that what we're building isn't valuable."
That is, in fact, a perfectly rational response. Shareholders lamenting their losses ought really to take a harder look in the mirror to find the culprit: No one could have been unaware that Facebook's IPO was one of the most overhyped flotations in the history of the U.S. stock market. The signs of speculative excess were everywhere.
A company's management does not control its stock price; instead, it should focus on building long-term value. If they are successful, the stock price ought to take care of itself over time. Where Zuckerberg et al are vulnerable to legitimate criticism is whether or not their fundamental strategy is right. Does it matter, for example that the number of per-user 'likes" and comments has increased in the past year, as Zuckerberg noted? Given Facebook's current business model, it's not at all clear that engagement translates directly into profits.
