In depth analysis on this market and economy
Do the markets drive the headlines or do the headlines drive the markets? And more to the point, what’s the outlook for the economy and the markets from here right now at these levels? Let’s dig in.
On Squawkbox this morning, I saw an analyst I used to appear with and respect from back when I used to be a part of the CNBC’s Kudlow Report, Brian Belski, so I turned off the mute and listened to what he had to say.
He was talking about how investors this year haven’t had to deal with any significant bad news of the sort that we had to deal each of the last couple years. He said the news out of the Europe this year hasn’t been as alarming and the economic newsflow overall has been pretty good so far this year.
I thought about that for a second and then I thought — hold on, that’s not necessarily true. As I’ve pointed out repeatedly on my Marketwatch blog for the last few years, you can pretty much always find the exact same economic and financial headlines in the mainstream media on any given day. For example, can you tell me which headline is from today and which one is from three weeks ago and which one is from three years ago?
A) Europe Urged to Fix Crisis as G-20 Warns of More Stress
OR
B) G20 commits to doubling IMF funds to fight eurozone crisis
OR
C) UK, France, Germany urge G20 post-crisis plan, tougher regulation
Does it matter? Fine, for the record, the answer is that A is three weeks ago, B is from today and C is from three years ago. The articles and what they say are essentially all the same though. The reason that you don’t know about the latest Eurocrisis updates is because the markets have been steadily strong, so you’re not looking for a reason to blame the weakness on. The weakness isn’t necessarily caused by the Eurocrisis — the stock market always has 5-10% pullbacks and rallies in bull markets, in bear markets and in sideways markets. But you’ll suddenly see the headlines start to focus on Europe if and when stocks pull back another 5-10%. And at some point, the markets will indeed have another 5-10% pullback, no matter the latest banking crises from Europe and the US are at the time.
But as I’ve pointed out before, when the broader US economy is growing as S&P 500 earnings are in the growth phase of the economic cycle, the broader markets are likely to be in bull market phase. And as the Fed has become such a powerfully leveraged force in the broader economy and the direction that capital flows in that economy, we’ll likely remain in growth mode until the Fed doesn’t just stop all the quantitative easing they’re doing, but it’ll be after they finally raise rates and then we’ll likely see them scramble to contain the bubbles and runaway inflationary growth that their current policies are putting in place, and at that point, we’ll probably turn bearish for the next part of the cycle.
So you’ve got the headlines, the actual economy and the individual stocks with emotional investors and traders all influencing each other, feeding off each other and creating self-fulfilling cycles both positive and negative. That’s called “Reflexivity”, by the way, and let’s hit on that theory for a minute because it is so important to investing in the 21st century society.
When I first moved to NYC, I started devouring every investment guru book I could get my hands on. And given the fact that I got to NYC with hardly any money and was making $6 an hour plus tips as a barista at Starbucks for the first two months I lived there, it wasn’t like I could just go down to Barnes & Nobles and fill a basket to purchase and take home. My next door neighbor when I first moved into my apartment in the middle of the projects on 101st and Amsterdam was an Ph D economist candidate at Columbia from Austria. He gave me George Soros’ classic book, The Alchemy of Finance (Simon & Schuster, 1988) ISBN 0-671-66338-4 (paperback: Wiley, 2003; ISBN 0-471-44549-5). It introduced me to Soros’ theory of “Reflexivity” in the markets and economies.
Here’s a brief, but rather accurate description of Reflexivity from Wikipedia:
Reflexivity is based on three main ideas:[22]
- Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.
- Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the character of the equilibrium process is best considered in terms of probabilities.
- Investors’ observation of and participation in the capital markets may at times influence valuations and fundamental conditions or outcomes.
I’d like to get some ideas from each of you to think about how each of those bullet points applies to the stock market and economy right now. Please comment below or email me your thoughts on this topic atcody@clwillard.com.
So the upshot in this analysis and how it applies to our markets and positions right now is that the playbook remains the same. As this economy and tech earnings in particular remain on track for growth this year and next, we’ll want to buy tech stocks aggressively once again the next time stocks get crushed and the headlines on CNBC and the WSJ are all about some economic crisis du jour that you’re suddenly supposed to be freaking out about. We’ve certainly had a pullback in the broader markets of late and I have indeed been scaling back into some of the tech names I trimmed back when we were at the highs, but I won’t be getting out and out aggressive until the next time the headlines scream “East Germany’s Economy Far Sicker Than Expected“.
Oh wait, did the “East Germany” identifier in that headline giveaway that I found that headline from back in…wait for it…1990. If you sell stocks the next time you see a headline that “Spain’s Economy is Far Sicker Than Expected” in twenty years, you’ll feel as silly as the guys who sold back in 1990 because they were worried about Germany’s economy, East or West, North or South, whatever, back in 1990.
