Could it be the upside surprises?

U.S. stock markets have marched higher despite a pandemic, an economic downturn, and social justice protests – and a lot of people have wondered why.

Greg Rosalsky of Plant Money spoke with Nobel Prize-winning economist Robert Shiller about, “…the mass psychology of a gazillion buyers and sellers, who each are telling themselves their own stories about why they’re making the trades they’re making.”

Rosalsky and Shiller discussed some narratives that purport to explain recent market performance, including:

·         Quarantine boredom. Matt Levine of Bloomberg has postulated “…a lot of individual investors buy stocks mainly because it’s fun, and that the more fun stocks are, and the less fun everything else is, the more they’ll buy stocks. In a pandemic, when people can’t really leave their house and sports are canceled, there is a lot less fun to be had elsewhere…so people buy more stocks.”

·         Big, publicly–traded companies are safe. This theory suggests businesses hit hardest by the economic downturn often are not traded on stock exchanges. In a separate article, Rosalsky cited former technology executive Eric Schmidt who wrote, “Gigantic corporations, which have deep pockets, fancy accountants, huge legal teams, and access to international financial markets, are also better equipped to weather shocks than your local hardware store or small manufacturing company.”

 ·         Don’t fight central banks. “The Fed is using its unlimited money-printing machine to single-handedly prop up the stock market. ‘The Fed is itself an important narrative,’ Shiller says. In reality, he says the Fed’s magic over the real economy is limited. But its statements clearly move markets, and it has lots of power as a storyteller,” reported Rosalsky.

On Saturday, Lisa Beilfuss of Barron’s offered another narrative. She reported:

“…upside economic surprises over the past two weeks – mortgage applications hit the highest level since 2008, retail sales rose at the fastest pace ever, and U.S. businesses added 2.5 million jobs in May instead of cutting an anticipated eight million, to name a few – are even better than they look and offer at least some proof that the stock-market rebound was driven by expectations for improving fundamentals…It’s about the magnitude of the surprises versus Wall Street’s expectations.”

We don’t know which narratives were responsible, but major U.S. stock indices moved higher last week.

What do you think? In recent years, we’ve learned a lot about why investors do the things they do. For instance, we now know investors are not the omniscient, rational decision-makers economists believed them to be. Investors have built-in biases that sometimes cause them make errors in thinking.

One of those biases is known as confirmation bias. Investors (and non-investors) have a tendency to seek data that reinforces their beliefs and ignore data that suggests they’re wrong. Recently, sentiment data has been published that supports diverse ideas about the direction of the economy and stock markets. For example:

·         Consumer sentiment was up month-to-month, suggesting Americans were more optimistic about their personal finances and current economic prospects in June than they were in May. However, sentiment remains down year-to-year and below the baseline, which is consumer sentiment in 1966 (the year the survey began).

·         Investor sentiment was down week-to-week. Almost one-half of participants (47.8 percent) in the American Association of Individual Investors (AAII) Sentiment survey were feeling bearish last week, while one-fourth (24.4 percent) were feeling bullish. The bulls were down 9.9 percent week-to-week, and the bears were up 9.7 percent week-to-week. Some investors consider the AAII survey to be a contrarian indicator, meaning they think the survey’s prevailing sentiment is incorrect. In this case, contrarians would be bullish.

·         Money managers think the market is overvalued. Bank of America surveyed 212 money managers with $598 billion under management and reported 78 percent think the stock market is pricey. Survey participants indicated the most crowded trades were U.S. technology and growth stocks, reported John Melloy of CNBC.

When data supports varied opinions, how can investors avoid mistakes? One of the best ways is to work with an advisor who has a clearly defined process and who will help you develop a plan to meet your financial goals.

Weekly Focus – Think About It
“A public-opinion poll is no substitute for thought.”
–Warren Buffett, Investor and philanthropist

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