Short On Time… Executive Summary
Lots of earnings this week. So far, most companies have beaten estimates. Midterm elections are tomorrow. I’m tired of the texts, emails, calls and ads. The market has been a bit volatile as of late, especially tech. I don’t think we’ve yet seen the best of AI and suspect that buildout will continue. Historically, the market has done well post midterm elections. We will see how it goes this time.
Humor me for a few minutes. I know it says short on time above, but I am going to take a little extra space here today. If you don’t know who Howard Marks is, look him up. He’s an investment rock star you’ve never heard of. He wrote a memo back in 2016 called “What Does The Market Know?” I like to re-read it after days like Friday. It holds up. I am going to summarize it below. You can use the Googles if you want to read the whole thing. It’s about 9 pages. Here we go.
Marks's main point is that a falling market doesn't mean investors know something you don't. Price moves mostly reflect crowd psychology, so you shouldn't take your cues from them. The market is a voting machine in the short term and a weighing machine long term. Meaning, it is a popularity contest short term, but the fundamentals will prevail long term.
These are the main ideas:
- Prices reflect mood more than facts. In the short run, markets swing between optimism and pessimism much more than the fundamentals change. A drop tells you people feel worse, not that the outlook has actually gotten worse.
- The market isn't a reliable forecaster. People assume a decline "knows" a recession or a crisis is coming. History is full of selloffs that predicted things that never happened.
- Fear makes the narrative. When prices fall, investors come up with gloomy explanations and then treat those stories as evidence. That pushes prices even further from value.
- Selling into weakness locks in losses. Selling just because prices fell means buying high and selling low. The better question is whether the asset is now cheap compared with what it's worth.
- Do your own analysis. He says to focus on fundamentals and value rather than on what the tape seems to be saying. Selloffs driven by pessimism are often where the best bargains come from.
The bottom line is to think independently and stay calm. A drop in prices on its own is a reason to look for bargains, not a reason to sell.
The Week On Wall Street
Stocks ended last week lower as disappointing Q3 corporate reports led to a tech-led selloff that deepened on Friday. The Standard & Poor’s 500 Index slipped 0.57 percent, while the Nasdaq Composite Index declined 2.00 percent. The Dow Jones Industrial Average fell 0.85 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, rose 0.85 percent.
Early Enthusiasm
The AI trade got a fresh boost to kick off the week as one of the largest AI platforms filed for an initial public offering. Investors also appeared upbeat about one of the biggest weeks for Q3 corporate earnings results. Monday’s momentum extended into Tuesday’s session, while falling oil prices over both days added to investor enthusiasm. Then midweek, the Fed held rates steady as expected, which was met with mixed trading. But all three averages closed modestly higher on Wednesday. Over the first three days of the week, the Nasdaq rose more than 2 percent and the S&P 500 added more than 1½ percent. Thursday’s session opened on a down note following mixed Q3 corporate results from two of the largest tech giants. Despite a stronger-than-expected gross domestic product (GDP) report and the fact that seven out of the 11 S&P 500 sectors advanced, stocks remained under pressure throughout the day. Then Friday, the tech-led selloff deepened as traders appeared to favor more defensive sectors as the month closed out. The Nasdaq declined nearly 3 percent over the session.
Upbeat Q3 GDP Report
The Fed’s decision last Wednesday to keep short-term interest rates unchanged was expected. But two Fed officials voted for raising rates, which was a bit of a surprise. Another surprise last week was news that the economy grew 3.4 percent in Q3, according to the Commerce Department’s initial estimate. That beat economists’ expectations of 3.1 percent growth but, more importantly, marked an acceleration from Q2, when GDP grew 2.2 percent.
This Week: Key Economic Data
Monday: Purchasing Managers Index (PMI)—Manufacturing. Construction Spending.
Tuesday: Job Openings & Labor Turnover. Factory Orders.
Wednesday: ADP National Employment Report (private sector). Trade Balance. PMI—Services.
Thursday: Productivity and Costs. Weekly Jobless Claims.
Friday: Employment Report. U. Michigan Consumer Survey. Consumer Credit.
This Week: Companies Reporting Earnings
Stay tuned...
