Bear Market Excuses
Last week, we discussed why investors conflate various rationales when confronted with unknown stock market moves. As stated in ``What's Your Stock Market Story?,'' people much prefer a narrative to any admission that market movements are often random. We know little, understand less and hate to admit it most of all.
That column generated more e-mail than anything I've written (except the one about investing in climate change). Lots of you wrote in last week, and I appreciate all of the kind words and well-intentioned constructive criticism. But some of you dismissed my premise that humans really don't know why markets are doing what they are doing. Instead, you offered up a series of rational explanations. What follows is the most coherent of those arguments. To save space, I am leaving out arguments that astrologyand/or Obamacare caused the crash.
You will note all of these have some plausibility. But note also that all of these were well known long before the market began to wobble.
Hedge-fund selling: This is a standard answer for almost any unexplained market move. Here's something to consider: I don't recall hearing anyone saying, "Tesla and Netflix are going up due to hedge-fund buying."
Hedgies have been falsely accused of everything from the credit crisis in 2008 to the dot-com bubble. Considering they manage a little more than $2 trillion -- not all of it in equities -- readers seem to credit them with having far too much influence relative to their assets.
U.S. bull market is five-years old: This is true. It has been five years since the March 2009 lows, and this bull now is five-years old. It is longer than the median market cycle of 3.6 years. But there is no law that says that bull markets end after five years. Others have lasted longer (see this and this).
End of QE: Yes, quantitative easing is ending. The Federal Reserve has been telling us this for more than two years now, and made it clear it was imminent last June. Is that why markets in 2014 suddenly got squirrely?
Slowing earnings: Somewhat misleading -- earnings are still growing, albeit at a slower rate of increase. However, this is something that has been forecast for several years as earning recovered from the 92 percent plummet of 2008-09.
April 15: Yes, tax day is tomorrow, but this is hardly the sort of surprise that rocks markets. Tax day is always in the middle of April, even if it sometimes falls on a weekend. Is this really why markets have been soft in 2014?
China slowdown: China, as Jim Chanos of Kynikos Associates has persuasively argued for several years, is slowing. Again, this is no surprise. Indeed, the banking and credit issues there have been deeply dissected by analysts and news media alike. The notion that China's slowdown is suddenly roiling the U.S. seems to be a reach.
Ukraine concerns: Military action always makes investors nervous. However, the crisis began in late February -- which hardly explains the January slump and the recovery in February. Somehow, I doubt the market anticipated the Russian annexation of Crimea by months.
Valuation: U.S. Stocks are fairly valued by almost every measure. The debate is whether we only a little overvalued or are we wildly overvalued? But that raises the question: Why did markets ignore valuation for so long and then suddenly it matters?
Technicals: Other e-mailers pointed to some technical issues: A head and shoulders was forming, the Dow Theory was in a non-confirmation (Yes, it is; no it's not, said other e-mailers).
All of these raise the most important question: Why now? Why 2014's retreat after a scorching 30-percent-plus gain in 2013? If any of the above explanations were the basis for a report last year recommending that you sell stocks then, would you have paid attention?
All of this comes back to our original premise: The day-to-day, week-to-week action is random. Count on humans to try desperately to make some sense of this, looking for patterns that fit preconceptions, and clinging desperately to a comforting narrative.
I prefer the cold, hard truth of reality: We haven't the slightest idea what drove the daily action yesterday any more than we have the slightest clue as to what's going to drive it tomorrow.
If you have the constitution to get used to this truth, you will become a better investor.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Barry L Ritholtz at firstname.lastname@example.org
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