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?

 

 

 

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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

 

 

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Michael Lipper, CFA

 

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Data Performance/Easy.Interpretation/Not - Weekly Blog # 774

 

Mike Lipper’s Monday Morning Musings

Data Performance/Easy.Interpretation/Not

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

 

Simple Numbers Not Useful Answers

The Standard & Poor’s 500 index with dividends has annualized compounded performance reported to be 10.81% since its theoretical inception in1871. The index’s performance since 1965, the period for which Berkshire Hathaway has a public record is 9.9%.  The Buffett/Munger record for this period is 19.8%, or twice the index. I find the three-year record of Berkshire Hathaway compared to the S&P 500 and NASDAQ of greater interest. Berkshire’s compound growth rate was +11.34%, the S&P 500‘s +7.66%, and the NASDAQ +7.80%.  

 

The overall superior Berkshire result produces more comfort to me and clients than just the raw performance numbers. Remember, Berkshire’s combined results include their operating assets and expenses. I do not normally use three-year performance comparisons, as they frequently do not include one or more down years. The S&P 500 had three periods of two consecutive down years in the 58 years, vs. Berkshire which had only one such period. Over the entire 58 years the index fell in 13 calendar years, vs.11 years for Berkshire. (Psychiatrists tell us we feel twice as much pain from a loss vs. a similar gain, which makes sense arithmetically.)

 

Since we manage money for ourselves and others, investment performance is only part of the gain. Our reward is having the proceeds used productively by our beneficiaries or ourselves. If we or others squander the proceeds through bad choices its human impact is the penalty we should calculate in assessing success or failure.

 

Perspective on the last Three Years

On a purely mathematical basis, performance for the last three years suggests we have entered a different period than before. For the five years ended this past December, the S&P 500 index rose by an annualized 9.43 %, which is not a great deal different than its annualized 10.81% return since 1871. However, what is different is the S&P 500 Index growing only 7.66% annualized over the last three calendar years. (Berkshire, because it didn’t have the down year and had its operating side perform better than the security side, produced a compound annual return of 11.34%.)

 

While our accounts benefitted from Berkshire’s performance, the accounts will track a bit more closely to the index. I don’t know how much longer this particular phase will last, we have quite possibly entered a stagflation period. The president and past president have been spenders, comfortable with debts rising faster than the ability to repay it.  

 

If we define a period of stagflation from purely an investment perspective, we had six multi-year periods where the index did not produce a single year rising 20% or more, (1968-1974, 1974-1981, 1986-1989, 1992-1994, 1999-2002, 2004-2008, 2010-2012, 2014-2016).

 

A number of CEOs are changing. In many cases the new ones have strength in operations rather than skills climbing the political ladder.

 

We are also seeing changes at the supermarket. In one of the normally high-priced markets they are no longer carrying the highest price merchandise, e.g. lobster bisque. The weekly list of prices for stocks, bonds, commodities and indices are fluctuating wildly. Less than 10% of prices on the WSJ weekend list rose the week before last. This week 88% rose. To add to the confusion in the securities marketplace, the NYSE saw prices decline for four of the last five trading days, vs. three out of five for the more trading-oriented NASDAQ. For the week, 62% of prices dropped on the NASDAQ vs. only 54% on the NYSE.

 

American investors and their institutions have been selling US stocks but buying both European and Asian stocks. Those buying in the US have favored small-capitalization stocks, including those having more physical assets.

 

Low transaction volume in US stocks is being offset by investors favoring perceived to be less risky investments.

 

We may well be in a phase like the period between the Archduke being assassinated and the formal beginnings of World War I, which was obviously going to happen.

   

Question: What are you looking at to signify a new market phase?

 

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

Mike Lipper's Blog: “This was the Worst Week of the Year” - Weekly Blog # 773

 

Mike Lipper's Blog: A Terrible Week - Weekly Blog # 772

 

Mike Lipper's Blog: Primer on Starts of Cyclical & Stagflation - Weekly Blog # 771

 

 

 

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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.