Quick Hit: The Market Jolt That Wasn't

In the lead-up to today’s US inflation report, headlines declared it a “big test” for markets—if too high, rate hike fears would spike again, potentially “pouring fuel on the fire of last week’s market sell-off.” Sure enough, when the data showed CPI rising 0.5% m/m—more than expected—and bringing the year-over-year inflation rate to 2.1%, S&P 500 futures reversed a 0.5% gain in premarket trading to fall 1.2%. When stocks opened, the S&P 500 initially fell 0.3%. But by mid-morning it was up, and the index finished the day up 1.3%.^[i] Seems the report wasn’t so make-or-break after all. This holds an important lesson for investors: Beware of claims any event or report will have a preset market impact—especially in the very short term. Moreover, always remember the longer term is what counts most.

Saying why stocks behaved the way they did on any day is a foolish endeavor, but in this case, it wouldn’t surprise us if bots were programmed to react to the seeming spike, while the humans digested all of the available information, including the many economists who argued the headline spike stemmed mostly from fuel prices and seasonality—not meaningful signs of broadly accelerating prices across the entire economy.

Trying to anticipate markets’ immediate reaction to a scheduled, widely anticipated event (e.g., an election result or data release) is folly. Markets often do what the crowd doesn’t expect. Stocks discount all widely known information, including widely held expectations. Remember when President Trump’s election was supposed to roil markets? S&P 500 futures plummeted overnight and foreign markets tumbled while Americans slept, but when US markets opened, the S&P 500 rose 1.1%.^[ii] We’ve also had several instances where stocks defied warnings that Fed rate hikes could bring immediate turmoil. Sometimes it can be almost comical how investors can seemingly shrug at the monster they are told is under the bed and get on with life. 

Intraday price movements are a function of mass psychology—how millions of investors and traders with a wide array of goals, time horizons, biases and opinions feel about whatever is happening at any given moment. Projecting the outcome would require mind-reading on a grand scale. And even that wouldn’t work, as folks often say one thing and do another.

Even if the crowd is right, it is impossible to act on such news anyway. Consider how fast markets price in this stuff: Earnings announcements show up in stock prices within microseconds. By the time the news hits headlines, it is old from markets’ perspective, offering readers no investment edge. Since trying to play short-term movements is futile, we believe investors benefit from keeping a longer perspective. Patience rewards, not reacting to alleged “big tests” for markets. Blips come and go. Market cycles are what matter.