What Moves the Stock Market? - Weekly Blog # 824

 

Mike Lipper’s Monday Morning Musings

 

What Moves the Stock Market?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

   

 

         

Fearful Challenge

A common mistake many people make is confusing the credibility of spiritual leaders and markets pundits. Professional preachers proclaim their belief in what will happen in the fullness of time. Stock market pundits, who are not as bright or skilled as many religious speakers, make the mistake of being more specific about dates and price levels. At best, market prognosticators can occasionally be right about dates and/or prices, but rarely both at the same time.

 

With all their mathematics and computer skills, recorded history suggests the future should be knowable in every instance. While we have great precision as to what happened, we don’t know what caused people to do what they do. Since we don’t rigorously examine our deep emotions for each action, we may not know exactly why we bought or sold something at a particular point in time.

 

Best We Can Do

The best we can do is identify what we think we knew at a particular point in time. Investors currently have a plethora of prices and other indices available to them, but rarely a record of emotions. Furthermore, our decision-making process evolves over time, influenced by current leadership and the ideas of other people.

 

Because we only know or remember the numerical data surrounding our decisions, we attribute our decisions exclusively to numbers. I believe this is why in looking at financial history we tie our decisions exclusively to the known numbers. It is the main reason many of the numbers do not generate good predictions. I would not be surprised that the track record is only 60%-75% accurate. (This falls under the old label of “good enough for government work”.) 

 

Thoughts on the Day of the Decision

There are only about 240 days a year when most investors can execute an order. Most investors probably trade less than once per month, with institutional investors trading less than 8 days per month in their long maturity portfolios. Consequently, most investors are not active most days, with nothing spurring them to action in each portfolio. Additionally, the spur to act may occur on quite a different day than the trade, unless price is the cause. Thus, it is difficult for an outsider to identify the ultimate cause of the action.

 

What Could Have Been the Critical Fact Last Week?

1. The DJ Transportation Index chart looks toppy.
2. FT headline “Hedge funds stampede into cocoa futures”. (Hedge funds are trend followers and there is a history of cocoa crashes sending players into highly leveraged coffee plays.)
3. Morgan Stanley is laying off several hundred from their wealth management division. (This division is the central reason Morgan Stanley is viewed more highly than investment banking and trading driven Goldman Sachs.)
4. In the chart in the weekend Wall Street Journal of stock indices, commodities, currencies, and ETFs, 65% are declining.

 

Too Narrow a Focus on Inflation

Inflation is caused by an imbalance between supply and demand for an undetermined period of time. It includes the follow elements: supply or demand shocks caused by weather, accidents, government actions like tariffs and other impediments to free and/or easy trade, and partial or complete military mobilizations. (In terms of the current US situation, the federal government is the single largest contributor to inflation, followed by union management pay demands.

 

Calendar Guide

While the calendar year is already more than 10% complete, we probably have not seen the most critical announcements of the year. Considering we have a probable lame duck president, divided political parties and a split Congress, this may be the time to build a higher-than-normal cash reserve to be used to buy some sound investments for the remainder of the decade.

 

What Do You Think?

 

 

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Picking Winners/Avoiding Losers - Weekly Blog # 823

Mike Lipper's Blog: Is This “Bull Market” Real? - Weekly Blog # 822

Mike Lipper's Blog: Worth vs Price Historically - Weekly Blog # 821

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.