The Uncomfortable Truth About Mr. Market

FIVE THINGS YOU SHOULD KNOW

Equity Markets – finished lower this week with U.S. stocks (S&P 500) down –1.38% and international stocks (EAFE) losing–1.76%
Fixed Income Markets – fell this week with investment grade bonds (AGG) down –0.24% and high yield bonds (JNK) down –0.55%
Currency Alarm – Alarm bells rang in Asian countries as their currencies fell to multi-month lows from the renewed advance in the US dollar. This prompted authorities in Japan and China to step up defense of their troubled exchange rates with Japan issuing its strongest warning in weeks against rapid declines in the yen, with its top currency official saying the nation is ready to “take action”. The Japanese currency retracted from a 10-month low after those comments from Masato Kanda, VP minister for international affairs.
Europe Stagflation – Stagflation concerns across the euro area reignited with elevated oil prices and weak economic data from Germany. European stocks continued to slide with the Stoxx 600 index retreating 0.6%, falling for the sixth straight session after the reduction in German factory orders. Brent Crude prices approached $90 per barrel after the largest OPEC+ oil producers extended their supply cuts to year-end. Deepening signs of an economic slowdown in China paired with the weakness in Europe amplified the pressure on equity futures in the US.
Key Insight – [VIDEO &ARTICLE] All too often investors are befuddled by the stock market’s “behavior.” The biggest reason for this is our unknowing subconscious habit of imparting our own outlooks, experiences, or values (in short humanhood) onto something that is much better understood as a calculator than a person. This week we explore this concept and some of its common examples to better understand how to think about markets.

INSIGHTS FOR INVESTORS

by Tim Mitrovich

INSIGHTS for INVESTORS by Tim Mitrovich

“In the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company.” – Benjamin Graham Introduction Most investors seek an information “edge” that will help them “win” when it comes to investing. Such an “edge” is in all reality mostly illusory. The real edge to be gained when it comes to investing is in one’s mindset. One important mindset that I have discovered over my almost 30 years of investing is to avoid giving markets human attributes or assuming that markets should behave in a manner befitting a rational person. Thus, with clients I have discussed “Mr. Market” for many years now and helped call out those premises and/or conclusions about people’s beliefs around what the market will/should do based on such faulty logic. I first shared the message below (updated in part) back in January of 2021 and was pleased with the feedback from clients who found it helpful and eye-opening, as well as those who read it after the Journal of Business picked it up to publish. At the end of the day, the real reason to avoid thinking of the market as though it’s a person is that it almost always leads to emotionality whether from reacting to headlines that trigger one on a human level or by taking the market’s movements personally as though it’s trying attack you personally. Succeeding as an investor is about learning to think about our investments as the market does, cold and calculating, not as we would most other aspects of our lives. I hope you find this helpful and enlightening in a way that lightens the burdens that many investors often feel around their accounts and finances.

What’s Up with Mr. Market Anyway?

How many times, especially in the last year, have you found yourself saying, “I just don’t understand Mr. Market”?

I certainly had more than a few even after many years of studying and working in markets. The often counter-intuitive nature of how markets can, and do, behave over short periods of time is one of those “truths” you can know and still need to remind yourself of continuously.

What explains some of this confusion?

For one thing, we assume Mr. Market would behave like a “normal” person would, i.e. get/be down after bad news, and cheer good news. And while this is true sometimes, more importantly quite often it reacts the opposite as one would reasonably expect – which makes using our natural feelings/logic counterproductive to making more consistently effective investment decisions. Here are some of the reasons why.

Mr. Market is Ruthless – First, Mr. Market is far more “ruthless” in how he views headlines. Consider how markets will often rally during periods of war, natural disaster, or most recently even a global pandemic. We understandably, and correctly, consider things like the cost of life or the emotional cost of such events. And while the market may consider them too it does so only in terms of the disruption of production while counterbalancing any such costs with the increase in production and government intervention (e.g. the trillions of dollars of stimulus money distributed during Covid) that usually also occurs during such times. So, while we may be worried, sad, or scared and could understandably think Mr. Market should reflect similar sentiment in the form of lower stock prices, we are often surprised (as many were in 2020) when he is looking past all such emotional aspects and just focusing on the math.

Mr. Market is Actually Not One Person/Stock but Many – Second, Mr. Market isn’t actually just one person but a collection of many. You have undoubtedly read many stories, witnessed personally or even been a part of the difference in how people behave when they are by themselves/alone versus part of a herd. Much of herd behavior can be defined by seemingly irrational behavior, excessive fear or greed and quick and sudden moves based more on fight or flight than maturity and civility. If you use this filter to evaluate many market movements during times of external stress, you’ll find it explains things much better than a one-on-one encounter. Furthermore, the market is not just about one stock or sector of the economy but many. While many companies/stocks may struggle under a certain set of circumstances, others may thrive. There is no better example of this than 2020 where much of the economy struggled mightily, as did many sectors and stocks within the market, but those were offset by other parts of the market (e.g. technology) which pushed the overall stock market higher. It’s a common miscalculation based on our personal perceptions formed by our own negative experiences from our own industry, local economy, or friend’s business that those must reflect/forecast the broader economy or market. Our experiences are usually shaped by those things around us, while most of the public markets are massive companies reflecting a much more complex and nuisance reality.

Mr. Market is Not the Economy – A third reason the market can confuse people is that the market is NOT the economy, at least not moment by moment as most would expect it to be. There are countless reasons for this, the first being the one we mentioned above which is that the stock market doesn’t reflect the entire economy, it reflects the publicly traded companies within the economy. Secondly, unlike people who tend to be “prisoners of the moment” the market quite often has discounted the present and is already looking into the future. Lastly, companies through improving efficiency (see technology advancements), innovation, and ingenuity can often grow much faster than the economy as a whole which is comprised not just of the biggest and/or best companies but all companies within it.

Mr. Market Doesn’t Always “Appear” Rational – As the quote above by Benjamin Graham refers to, there are certainly periods of investor fear or euphoria that can overwhelm the weighing machine. Such periods, and the associated manic behavior of the market during them, aren’t much different than dealing with a drunk or crazed mob. The key thing to keep in mind is that Mr. Market usually “sobers up” before our individual emotions can abate during periods of intense turmoil. Consider again March of 2020, the whipsawing stock market, scary headlines around a pandemic, heightened political angst, and many more unknowns. Fear set in and panic ensued, and just about the time many investors were feeling as if all was lost and stocks were plummeting down 40%, Mr. Market saw through the fog of fear and began what would be a 65%+ gain into year-end.

Closing

For many it’s an uncomfortable fact to accept that Mr. Market does not care about us, our feelings or anyone else’s for that matter. Similarly uncomfortable to accept is that while Mr. Market may not be the kind of person we want to invite into our home for a dinner party, he likely needs to be someone we invite into our portfolios and plans in order to afford those dinners in the future.

Have a wonderful weekend,

Tim and the team at TEN Capital

Data, Just the Data

U.S. Jobless Claims – fell by 13,000 to 216,000 on the week ending September 2nd. This fell significantly below market expectations of 234,000, marking the lowest level since February.
U.S. Composite PMI �� was revised slightly lower to 50.2 in August 2023, down from the preliminary estimate of 50.4 and the previous month’s reading of 52.0. The latest data indicates the slowest rate of business activity increase in the U.S. private sector since February, much due to a weaker expansion in the service sector and a renewed decline in manufacturing output.
U.S. ISM Services PMI – unexpectedly jumped to 54.5 in August 2023, pointing to the strongest growth in the services sector in six months. August’s data was compared to 52.7 in July and preliminary estimates of 52.5.
UK Construction PMI – declined to 50.8 in August 2023 from 51.7 in July, pointing to a marginal increase in total business activity. Growth within the commercial and civil engineering segments helped to offset the decline in house building.
Eurozone PPI – fell by 0.5% from the previous month in July of 2023 This fell closely in line with market estimates of a 0.6% reduction and extends the 0.4% drop from the previous month. This was the seventh consecutive month of decreases in producer prices.

NEWS

The Uncomfortable Truth About Mr. Market

FIVE THINGS YOU SHOULD KNOW

INSIGHTS FOR INVESTORS

Data, Just the Data

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