Important Stock Market Reminder
An Important Stock Market Reminder
In these volatile times, I find different people connect with different anecdotes. One of our toughest jobs is to bring calm and reason during tumultuous times. This becomes especially difficult when we are talking about emotional stuff, like money and one’s future. I find a great way to combat these fears is with a cool and calm demeanor coupled with lots of education.
For today’s lesson, I’m going to my bag of tricks to educate on something my CIO Mike Horwath always reminds us advisors. It is a great reminder and candidly quite simple. To me, it speaks to the disconnect between people’s fears and the reality this has on the stock markets. One question? Are you ready for some quick education?
The lesson of the day
Here is the tidbit worth committing to memory, despite what many of us want to believe. The notion is this, the stock market is approximately 6 months forward-looking! Huh! What! Smash! Boom! Biff! That is right, and I know this may have shattered your universe, but it is true.
I tell you this because we, as humans, have a hard time conceptualizing this. That means the markets care less about what is happening today in the economy, and more about where things are going in the future. We often get asked, “why is the market going up/down, things feel great/horrible?” Markets are always pricing in new information and expectations about the future, so if things turn out exactly as expected then the market shouldn’t move, right?
This to me is an essential concept to internalize if you want to invest in the “markets”. Understanding this basic principle can shed a lot of light on things, and in my experience help calm a lot of nerves. For instance, when the markets started to go downhill through the first few months of the year, in hindsight it was very rational because it was pricing the ever-changing expected path of the Federal Reserve. Fast forward to today, markets don’t really care too much about GDP today but are more concerned over the expected path of inflation and corporate earnings for the rest of the year into 2023. Crazy right?
This to me is very relevant information because I constantly hear clients get nervous about how high inflation is now or some other data point they picked up. Now, as I stated this I don’t want to downplay the magnitude of these data points. Rather, my point in saying all this is the market has already priced it in.
For instance, everyone knows interest rates are going to increase the rest of this year at a healthy pace. The bond market knows this as well believe it or not. In doing so, they’ve already priced in hefty increases, and thus in theory we’ve experienced the biggest hit in the bond market already. That said, if new information that potentially changes the course of rising interest rates comes to light, then there is likely another repricing event.
Don’t believe me?
Ok, example time for those non-believers. I’ll use a recent example that should hopefully confirm this notion. Covid! We all remember it as it shook up our entire universe in 2020. For context, the markets started a free fall basically in mid-Feb 2020. My company, and most of the free world, left their offices around March 16th not to return for a year or two. Honestly, when I came back my office looked like a time capsule it was quite insane. That said guess when the market had bottomed out in 2020? If you miraculously guessed March 23rd, you’d be right.
Said differently, one week after the world shut down and life as we knew it changed forever the markets bottomed out. At that point, there was no talk of vaccines. There was no talk of a cure. As a matter of fact, there was more talk of this being the black plague than the flu. I vividly remember my wife food shopping in surgical attire and washing our groceries down with Lysol. That my friends, is when the market bottomed. No end in sight or glimmer of hope to be had. But guess what? The markets didn’t care as they forged ahead looking 6 months ahead and what shifts would be made and where the markets would be.
Fast forward to 2022 and why I bring this concept to light. I do so to remind us that when times feel rough and data seems ugly, the markets were already here 6 months ago and have moved on. This is what makes timing the market an extremely difficult, if not impossible endeavor. It is also why the markets seem to move on before we do. If we do actually experience a recession, remember the markets were there first and will climb out of it first as well.
Hope you appreciate this little reminder as I find solace in it any time the markets go through a rough patch myself. Remember the markets and traders are always many steps ahead of whatever info you hear.
As always stay wealthy, healthy, and happy.
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