Wednesday, October 27, 2021

How to fix the skittish U.S. stock market

After stocks plunged in October, the Washington Post declared the markets are the only stable foundation of our economy. Critics responded with fury. Maybe, they said, investors and market participants should be judged by the quality of their thought, not how far they rise in a day’s trading. Maybe not.

Curious about how we construct their expectations, Joe Nocera pointed us to a YouTube video of Martha Stewart warning “beware the market.”

Money manager Jack Bogle in particular has worried that CNBC’s unending focus on the latest technology is fanning investor hysteria. “The more you focus on the numbers,” he has said, “the more you have to become a cultist.”

What should a sane, sane market think and say about a mysterious set of economic numbers — generally lousy jobs data and a news conference in which I called it “mystifying”?

When high-fiving stocks and red-faced economists sit in meetings, what’s their trade secret to learning how to thaw the markets? When we’re using bad economic data as a basis for asset prices, and when GDP is still in recession, how can investors in consumer staples or consumer discretionary stocks ask themselves, “Gee, that business or stocks may be fine, but what should we think about residential construction or the big players in the auto industry?” When we’re worried about buying a house, how much of that concern reflects economic uncertainty and how much is simple reality, and how much further would it have gone if data hadn’t been distorted by a cash-rich couple living beyond their means?

We need to know. What should a speculative cell believe and say?

The best security is an asymmetric bond of no current risk or return.

Market participants don’t know whether they can expect a better or worse year than they had in 2018. They only know whether they can anticipate the loss of more value or of more earnings in 2019 than they experienced in 2018. Pundits say whether you should bet on the S&P 500 or the VWAP (Volkswagen’s share price) of Volkswagen Group.

Are stocks overdue for an up move, and even for a sharp drop? Are you being set up for a market bounce, an acceptable, even optimistic gain? Are you simply prepared, rather than nervous, that what you believe in, in the scheme of things, will eventually come to pass?

Maybe investors can’t spend time figuring out markets.

Sometimes markets are indeterminate. You can’t and shouldn’t try to guess them from the data or their composition. If we were so fortunate to invest in common stocks without having to get our bearings from their annual earnings reports, nothing today would be different. Markets, after all, are fragile by nature. If there was no way to know what stocks would be worth tomorrow and you could catch just one shot at it, the market’s volatility, should we decide that this or that individual stock was right for us, would be significantly higher.

Then there are “tactical” markets. Today, in 2019, is one of those. Some might interpret today’s bellicose session on the Dow Jones Industrial Average to be a signal of (fear) instead of the market’s unwavering determination to go higher and higher. So far, it’s not convincing us that stocks are up in today’s testing market because the focus isn’t on what they’re worth tomorrow but on where they’re going today. The wonder of this process is how much of today’s action is motivated by event-based emotions, and how much by logical thinking about the way markets are evolving.

Maybe that’s the most important lesson from today’s turbulence: Those that can manage their emotions are more likely to win in an unstable market. But there are ways to handle the fluctuating highs and lows. One is to avoid doing anything that you know would send you to the fair’s dispatch early. Another is to only invest in things that you can afford to lose. And we don’t have the luxury of spending too much time wondering which is which — or how much to be nervous. We only have time to worry if we expect to lose.

Hopefully, history will not repeat itself, but today’s ups and downs won’t. The key thing is to keep pushing forward, trying to understand what we should be concerned about and when we should be alarmed.

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