In today’s Money Morning…getting the odds on your side before you assess the market…journalists desperate to place the blame on Trump…emotional explanations are enticing, but usually wrong…watch the trend, not the daily moves…and more…
Have you ever watched a game of footy (or whatever), discussed it with a friend afterward, and then said, ‘What game were you watching?’
Don’t you think it’s weird that two people with a reasonable knowledge and understanding of a game could come to two different conclusions about its outcome?
The fact is this stuff happens in life all the time. Truth, like beauty, is in the eye of the beholder.
And it happens especially in financial markets.
Take this report from the Financial Times explaining the overnight market action. The headline read: ‘Market’s shudder after US healthcare debacle’:
‘Investors took a bearish view of the president’s ability to push tax reform and other pro-growth policies through Congress after the collapse of Republicans’ healthcare bill last week, pushing the dollar to its lowest level since the immediate aftermath of the presidential election.
‘Global stocks retreated, US banks briefly slid into correction and the dollar slipped against the euro and yen, signalling an at least partial unwind of the so-called Trump trade. Investors turned to the havens of gold and sovereign bonds, as market measures of volatility sprung to their highest levels of the year at the start of the trading day in New York before reversing.’
Sounds pretty grim, doesn’t it?
While stocks were down in early trade, they finished the day flat. Maybe it wasn’t such a debacle after all? Maybe the writers were watching a different game?
The thing is, the casual observer of markets would read this and think, ‘Maybe it’s all coming undone. Trump’s honeymoon is over.’
But as I often say, you need to distinguish whether stocks are in a bull or bear market before imposing your prejudices on the market action. When stocks in general are in a bull market, it’s futile to think every correction is the start of something big.
There’s a very small chance you might be right. But you’re not playing with the odds on your side.
Now here’s an important point to consider when reading about the day-to-day market action these days. Most business journalists think Donald Trump is an affront to their intelligence. Therefore, if the market falls, it’s Trump’s fault.
That’s why the media blamed the recent correction on Trump’s failure to get his healthcare reform package through Congress. They look at the weakness in the dollar and blame it on the unwinding of the ‘Trump trade’.
But if you look at a chart of the US dollar index, you’ll see that there isn’t anything to really be concerned about.
As you can see below, the US dollar did indeed rally strongly following Trump’s election victory. And, as usually happens after a rally that drags everyone in, you get a pullback when the excitement dies down a bit.
Click to enlarge
That’s where we are now. It’s a correction. Overall, the US dollar index looks good. With the Eurozone and Japan still a good way behind the Fed’s interest rate raising program, there is nothing to suggest that the dollar should fall considerably from here.
But keep an eye on the 99 level for the index, which is roughly where the green line is in the chart above. That looks like a good support level. A sustained fall below here will suggest that the US economy might not be as strong as the market currently thinks. Or it could tell you that Japan and Europe are picking up the pace, meaning capital will flow out of the dollar and back into these major currencies.
But just because you think Trump is an embarrassment doesn’t mean the US dollar, economy, or stock market will come crumbling down. The US has had plenty of dubious presidents throughout its illustrious history, and the market has done just fine.
There’s a great story in the classic investment book, Reminiscences of a Stock Operator, a book about the infamous trader Jesse Livermore. In his early trading days, he often chats to an old bloke who sits in the exchange watching the tape, and asks what he thinks about certain stocks.
The old timer’s answer is always the same. He simply tells Livermore, ‘It’s a bull market, you know.’
Livermore thinks the old guy has lost it. But then he finally realises what he’s saying. And it’s this: A bull market lifts all stocks. Provided a company is well managed and not suffering any major competitive threat, a bull market will drag the share price higher.
It’s the same adage as, ‘A rising tide lifts all boats.’
The point of telling you this is that you shouldn’t get sucked into believing emotional interpretations of events. They’re seductive, and believable, but generally wrong.
To be honest, I have no idea what moves stock prices around from day to day. Sometimes things make sense. Sometimes they make no sense at all. Trying to understand daily moves is pointless. But understanding the general trend is very important. It will help you manage so much better during emotional times in the market, like last week when stocks dropped sharply and everyone panicked.
So if anyone asks you what you think of stocks right now, just say, ‘Well, it’s a bull market, you know.’ Because, really, that is all you need to know. Everything else is just an opinion. And everyone’s got one of those.