What If You Did Just Sell?
We discuss, "what if you did just sell?" Including what drives investors to do it, why it's so dangerous, and a better approach to making tough decisions.
Five Things You Should Know
Insights for Investors
"Intellectual brilliance is no guarantee against being dead wrong." - Carl Sagan
I hope you all had a wonderful Fourth of July and are enjoying summer finally starting in earnest. For me it’s a time full of all sorts of feelings and lots of nostalgia as I reflect on summers as a kid, time at the lake with Grandpa “TEN”, and now getting to see my children making many similar memories. When it comes to summertime and family, it is and should be, all about feelings and soaking up the emotion of the moment.
However, unlike embracing summertime, when it comes to investing, our natural reactions and feelings toward markets need to be put in a deep freeze. I hope you’ll take a moment to watch the video above where we explore the ramifications of giving in to our emotions as investors and want to be clear that the info below regarding markets today and understanding “Mr. Market” are not about being able to better predict the future, but rather help us all be more emotionally prepared to avoid making rash decisions.
So, while I don’t believe in investing based on feelings, if you do, the best way to do it is usually to fade your feelings and those of the crowd. And at this moment the crowd is incredibly bearish. As noted by Bespoke, according to the most recent AAII Investor Survey the number of “bullish” investors is back below 20%. To put that into perspective, such levels were last hit at the end of 2008 and early 2009, another tough time for markets and the economy but not a time to have left the market.
Such dire sentiment is not limited to investors, as Bloomberg pointed out that, “The worries among small business owners, consumers and others as illustrated by so-called Misery Indexes are similar to levels seen at the start of the pandemic and in the wake of the 2008 financial crisis.”
If you’ve felt that things feel bad and those around you seem to be in ill spirits, you aren’t wrong. However, as I cover in the article below on Mr. Market, how the market views data and certain realities is far different from how we naturally do it within our lives, and it is that disconnect that leads many investors to “zig” right when the market is about to “zag.”
If the world isn’t going to end today, what reasons for optimism does an investor have?
I’ll give you three.
1) Inflation appears to be abating.
Oil has settled around $100 a barrel, which if it holds, should go a long way to helping ease inflation. Remember that according to many estimates, oil prices impact the inflation levels by around 40% and that inflation is a “rate of change” metric. A stabilizing oil price may not bring a lot of relief at the pump but will bring down the inflation number meaningfully, likely giving the Fed cover to ease or pause their hikes sooner than currently expected.
Furthermore, oil isn’t the only commodity showing some signs of price relief. Josh Steiner of Hedgeye highlighted that, “…of those 19 components (in the Commodities Index), guess how many are higher in price today vs June 9th? There is only one component with a price currently above its June 9th price: Lean Hogs, +3.8% with a 1% Index weighting. In other words, 18 of the 19 commodities in the CRB Index have turned lower in the past month.”
These developments are a big, but not the sole reason for point #2.
2) Odds of a Soft Landing are Rising
Torsten Slok, Chief Economist, and upcoming Quarterly Event Speaker (see registration link above) highlighted some reasons to be optimistic about a soft landing stating, “This is the most anticipated recession ever. Maybe it is so anticipated that firms and households are so prepared for a slowdown that we may end up not having a recession.
There are two important reasons why we could get a soft landing:
1) Corporate profit margins are near all-time highs, and corporate cash balances are near record-highs, which gives companies room to absorb declines in demand without having to lay off workers, see the first chart below.
2) Consumers have record-high savings, which means that households will still have money to support consumer spending even if the unemployment rate starts rising, see the second chart.
The bottom line is that we could get a soft landing because both firms and households have significant buffers to deal with a negative hit to demand and incomes.
The implication for markets is that once the Fed pivots from hawkish to dovish, either because of inflation rolling over or growth slowing, credit markets and stock markets could move higher.”
3) Earnings Holding Strong So Far
While some companies are certainly facing headwinds, and the COVID stock darlings (e.g., Zoom, Peloton, etc.) have come back to earth based on inflated valuations, many companies are doing far better than you might expect given all the doom and gloom in the press. Bespoke noted that, “Guidance cuts are elevated at nearly 15%, but on net, more companies are still raising guidance than cutting it. EPS and revenue beat rates for this cohort are actually the highest since last June. While they're certainly down versus a year ago, these numbers are not consistent with a sudden collapse in business performance relative to expectations.”
Things may feel bad at the moment, but historical patterns and current data suggest that investors’ level of pessimism is likely overdone.
As we discuss in the piece below, Mr. Market often moves and reacts in ways that are very counterintuitive and hard to understand. And while the article is 18 months old, many of the same challenges discussed in the article are still with us today, and truth be told are always present to some degree.
The main point to take away is that embracing the differences in perspective between a warm-hearted human and the calculator that is Mr. Market, are key to not only successfully investing over time but maintaining one’s sanity along the way.
Have a wonderful weekend,
Tim and the team at TEN Capital
The Uncomfortable Truth about Mr. Market by Tim Mitrovich
Originally published 1/8/21
“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
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 25 years and countless hours of studying 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 we would, i.e. get/be down after bad news, and cheer good news. To some extent the market does, but with some important differences we’ll cover this week.
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 global pandemic. We understandably, and correctly, consider the cost of life. And while the market may consider that too it does so only in terms of the disruption of production and counterbalances it with the increase in production and government intervention (e.g. money) that usually also occurs during such times. So while we may be worried, sad or scared and thus think Mr. Market should reflect similar sentiment in the form of lower prices, he is looking past everything except the math.
Mr. Market is Actually Not One Person but Many – Second, Mr. Market isn’t actually just one person but a collection of many. To that end, while many companies and 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 that when we are more familiar or impacted by the bad, it may be hard to properly take into account that not everything or everyone may be in the same place.
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, but perhaps the most important is that the stock market doesn’t reflect the entire economy, it reflects the publicly traded companies within the economy. Furthermore, many companies through improving efficiency (see technology advancements), innovation and ingenuity can grow much faster than the economy as a whole which is comprised not just of the best companies but all companies within it.
Is Mr. Market Always Rational? – Absolutely not! 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. The key thing to keep in mind is that Mr. Market usually “sobers up” before our individual emotions can abate.Consider last March, the whipsawing stock market, scary headlines and all the unknowns. Fear set in and panic ensued, and just about the time the stock prices were acting, and many investors were feeling, as if all was lost Mr. Market saw through the fog of fear and began what would be a 65%+ gain into year end.
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 in order to afford those dinners in the future.
So How Does this Relate to Today’s Market?
Just when you thought things couldn’t get much more disheartening after the chaos of 2020, came the events of this week. Election drama, riots, political turmoil, new variants of COVID the market must have plummeted right? Nope, up over 1.5% for the week.
So, what is Mr. Market seeing that we may not be given our humanity or political leanings?
As market news source The Wealth Advisor noted this week regarding the disconnect between a strong market and political drama, “The positive outline here is simple — a slim Democratic majority is enough of an advantage to pass additional fiscal support but not large enough to pass more ambitious legislation like raising taxes or a Green New Deal. Some investors on Wednesday called this a “fiscal goldilocks” scenario.”
They also went on to state that “strategists see the early days of the Biden administration focused on one thing: vaccine deployment. And the smoother the rollout, the better the economic outcomes are likely to be this year.”
Furthermore, in the vein of point #2 above, the market also reflects the whole of the nation not just one political party (see chart below illustrating the fluctuating investor sentiment given party and election outcome over time) or point in time (no matter how disgusting Wednesday was). Mr. Market, and God willing this country over time, reflects the middle ground or at least the balance of extremes to keep things on the rails.
My Main Message
As we begin the new year with tired minds after 2020, broken hearts after days like Wednesday and considerable confusion as to what lies ahead let us not forget our personal and collective history of resilience.
And may we also take some comfort in that even when we may forget, despite his often cold and confusing nature, Mr. Market hasn’t.
Data, Just the Data
Data points this week included: