What Should Worry a Non-Worrier?
FIVE THINGS YOU SHOULD KNOW
- Equity Markets – were lower this week with U.S. stocks (S&P 500) down -1.20% while international stocks (EAFE) fell -0.11%.
- Fixed Income Markets – were higher with investment grade bonds (AGG) up 0.62% while high yield bonds (JNK) rose 0.94%.
- Fed Retires “Transitory” – This week saw Fed Chair Jerome Powell strike a surprisingly hawkish tone when announcing his belief that officials should consider removing pandemic support at a faster rate, while also officially retiring use of the word “transitory” in the Fed’s outlook on inflation. The Fed’s current plan was to begin tapering its asset-purchasing program by mid-2022, but on Powell’s comments market forecasts are now pricing in a 50/50 chance we see the purchases begin tapering by May of 2022.
- OPEC Un-wavered – Despite concerns around recent price crashes, OPEC announced this week they will stick with their current plan of increasing production by 400,000 barrels per day in January. The planned increase in supply comes at a time when many economists are already forecasting a surplus in the first quarter of 2022. The group plans to meet again on Jan. 4th to review the impact December has on the oil markets.
- Key Insight – [VIDEO] In the follow up to the video from two weeks ago on worry, Tim discusses the two common types of “non-worriers” and how some simple steps can not only help them keep their peaceful mindset, but also have confidence in it. [ARTICLE] The market is once again experiencing an uptick in volatility, and as usual the typical doomsayers come out AFTER the fact with more fearmongering. We breakdown what has the market rattled, why the truth is likely different than the headlines, and why history shows that most volatility should, if anything, be bought not sold.
INSIGHTS for INVESTORS
While the video above talks to the “non-worriers” out there, the market itself is full of plenty of worry these days. I would just remind you all that such moments always feel “special” when you are in the midst of them, but over time the VAST majority are quickly forgotten and even the memorable trials are overcome.
It was just a couple of months ago in September that the calls for the world to end began to pick up again during a relatively benign pullback. Analysts for Morgan Stanley and others rang the alarm bell around the next impending crash (not their first bad call), only to see the market rise over 6% since then, notwithstanding the current pullback.
This effort by some to always predict the next crash is as foolish as believing you actually have a great strategy for a game of musical chairs or that because you timed getting a chair once or twice, you must have a “special talent.”
A more accurate and healthier mindset is taking heed to Warren Buffett’s advice to invest as though you only get a handful of trades in your lifetime.
Of course, a bear market will happen again at some point, but how will you know? What will signal that any given set of conditions are “the” ones to fear as opposed to the ever-present bearish narratives that are also plausible reasons and yet don’t manifest?
Had you sold the “then market top” on February 19th of last year because you feared what COVID would become? When did you get back in, especially during a contentious election season that saw further volatility? And yet, since that date the S&P 500 is up almost 35%.
You can tell people markets don’t move up in straight lines and everyone will nod along to what they know is an obvious fact, and yet every ugly market open or 2-5% hiccup in the markets gets so many people worked up. They’ll point to the recent declines as the start of something bigger, seemingly blind to the fallacy of recency bias in their logic, they’ll express their feelings and emotions but almost never discuss actual analysis. Bespoke ran a piece touching on this where they pointed out that, “Since the low on March 23, 2020, big gaps down for the market (on both COVID news and non-COVID news) have not resulted in longer-term downtrends.” (see accompanying chart)
For example, did you know at current levels for the S&P, a pullback to 4,500 would be completely normal/probable from a technical perspective without compromising the bullish overall trend? Did you hear any such info during a narrative filled hyperbolic rant in the show or newsletter you consumed? Doubtful. In fact, as Daryl Jones of Hedgeye pointed out this morning, ‘over the last 10 years if you had bought stocks when the volatility index went over 30 you would have made money 8 out of 9 times over the next 30 days.’
Omicron – As we look at the worries of today you’ll of course see lots of talk about Omicron, and yet for all the fear-mongering on this topic very few people, a) actually now what additional threat if any it poses, and b) why from an investing perspective it should be traded any differently than the original variant/surge or any that have occurred thereafter which did not derail markets for any real length of time. In fact, most such newsbreaks signal buying opportunities over the last 18 months, counterintuitive as that is. Lastly, despite the initial hyperbole all evidence to date is that this variant’s symptoms are thankfully quite mild.
The Fed – The most recent “news” to rattle markets according to the press was Fed Chairman Powell’s comments this week that the taper could end a few months earlier than previously expected. Markets love easy money but lost in this narrative are the important additional points that a) central banks have discussed being more hawkish (e.g., less accommodative) many times during this cycle, but the evidence still firmly sits on the side of their hesitancy to back away to any meaningful degree, and b) some pullback in accommodation doesn’t mean overall monetary policy isn’t still very accommodative.
Jobs – Today’s supposed reason for the markets’ decline is a below expectations job report. However, if one takes just a bit of time to dig deeper, they’ll see that the amount of the “miss” was very close to the number of jobs that were added to the upward revisions for September and October. Furthermore, as Brian Wesbury pointed out “civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 1.136 million in November, the fastest pace in more than a year, helping push the unemployment rate to a new recovery low of 4.2%.”
We would just caution investors from not only emotional reactions to headline scares, but also from falling prey to oversimplified logic that any one thing will automatically lead to a definable outcome. New variants, Fed language/action or whatever happens next doesn’t necessarily mean anything.
To that end, consider the recent disconnect between sentiment and resulting action, whether it relates to future market movements or general economic data. Spikes in volatility and corresponding deflated investor sentiment have to date been false risk-off signals. Somewhat related is the disconnect over the last 18 months between consumer sentiment and actual spending (see chart below). As JPMorgan noted, “As inflation pressures and supply chain issues ease, we expect consumers to feel much better about the economy in 2022. In the meantime, when consumers feel gloomy, they often indulge in “retail therapy” and consumer spending has been particularly strong heading into the holiday season. In October, retail sales and personal consumption expenditures bounced +0.9% and +1.3%, respectively. Further, our proprietary Chase credit and debit card data show that consumer spending in November month-to-date is up 13.8% y/y, while discretionary spending (excluding food) is up 20.5% y/y vs. 14.8% in October. Americans may not be happy about rising prices but so far, it’s not stopping them from spending. Alongside an expected bounce of inventories as companies rush to stock shelves, the U.S. should see a solid holiday spending season.”
We still see the general path for economic data as improving (e.g., positive data from mortgage applications, ISM manufacturing and service sector data, etc.) and that should continue over the intermediate term without the return of COVID related lockdowns. While we also are prepared for a myriad of potential paths, the highest probability as we enter 2022 is the continuation of a strong market particularly, a) earnings growth does come in near the forecast of 8-9%, and/or b) if inflation actually surprises to the downside, vis a vis current expectations, which is quite probable. The Fed has been behind things this whole cycle and we think that streak could continue with their most recent inflation outlook, along with the variant scares providing reasons for them to delay hiking rates during an election year.
Turn off the news, and turn on some Christmas music and have a wonderful weekend,
Tim and the team at TEN Capital