What is the market doing?
I’m working on some charts for our quarterly client conference call, but really, the only question on everyone’s mind right now is “What is the market doing?“
Don’t look for answers on TV: This morning, chyron read “Ukraine, Fed rate hikes, uncertainty drive stocks plunge‘When the market fell 3%; after covering losses, chyron wrote’Stocks close higher on wild day. “
TV chyrons know everything, know nothing…
answer the questions”What is the market doing?It’s my job to not rely on the usual clichés. To show you the challenge, consider some of our favorite media favorites we all fall prey to from time to time:
“repricing risk“—in fact, that’s what the market does every moment, every hour, every day. Another pointless cliché is”Digestion Harvest,” shorthand for saying, “Oops, I don’t know why the price increase suddenly stopped. “I have to avoid”Looking forward to the end of the epidemic“Because, really, isn’t that what the market has been doing since March 2020? How much is new in the headlines? Ukrainian geopolitical influence?“When the possibility of a destabilizing Russia/Ukraine war has been in the headlines for months.
It’s not easy to think about the confusion surrounding current market behavior while trying to avoid hindsight bias and recency effects. But there are a few explanations that explain market behavior in 2022 better than the clichés above:
• economic chaos: Economically, we’re managing through a plethora of office space as some but not all of us go back to the 9-to-5 office. The excess may be converted into residential, or – like retail before it – slowly lost over decades. Where we work and live, and how much of this country will become virtual, will have an unknown impact on real estate values. That’s before we figure out when to restore the balance between goods and services to pre-pandemic levels and how to unravel supply chains.
The power unleashed by the pandemic goes well beyond the fight against Covid-19. We are in the midst of many major adjustments—economic, political, technological, philosophical—and how they will play out is unclear. These are basic questions about major economic sectors. Market consensus may be forming that potential changes could be more disruptive to the status quo than previously anticipated.
• From “free” to “cheap” money: Capital costs have been largely free for the past decade. This has stimulated the economy, encouraged more debt-based consumption, and boosted corporate profits. This period is coming to an end. The Fed is phasing out quantitative easing (QE) and canceling its zero interest rate policy (ZIRP).Markets are pricing in many unknowns: When Will the Fed raise interest rates? How much, to what federal funds rate? How will this affect the economy? Will it cool inflation?How this will affect corporate profits?
• Back to normal: We have been fascinated by the market in 2021, because the market in 2021 is very volatile and there is almost no pullback. volatility is a feature, not a bug of the market.This is it should be like – A 10% correction every 2 years, a 20% bear market every 7 years, and a 30% crash every 12 years. After a year when the market basically did one thing — they went up — a two-way market doesn’t feel right. In fact, 2021 is an outlier.
We don’t know what the answers to these questions are, but most of the time, we can effectively fool ourselves into believing that we have mastered it.real Uncertainty arises When we’re forced to admit that we don’t know what’s going to happen next. That spooked investors and led to heightened market volatility.
Corrections, retracements, crashes and declines (November 29, 2021)
experience a crash (January 14, 2022)
Cyclical bear market or secular bull market? (March 20, 2015)
lost news (June 16, 2005)