Personal Wealth Management / Market Volatility
The Market Narratives Are Volatile, Too
The narrative shift the last two days highlights the importance of taking a long-term view and shunning daily headline swings.
US stocks tumbled on Thursday, reversing Wednesdayâs big surge, as the correction continued amid extremely dour sentiment. There is no question such swings, particularly coming back-to-back, can be confusing and challenging for investors. But, hard as it may beâparticularly during a correctionâs throesâit is critical not to overthink day-to-day moves. The fast track to allowing marketsâ swings to cause you to lose your mind is, in my view, to read and believe the theories about what âexplainsâ daily market movement. This week is a case-in-point, as illustrated near perfectly by coverage of the Fedâs âsupersizedâ 50 basis point (bp, or 0.50 percentage point) hike.
As our commentary yesterday noted, in the immediate wake of the Fedâs widely watched move, markets didnât materially respond, alternating between small dips and modest gains. But as Fed head Jerome Powell took to the podium and poured cold water on the notion a 75 bp hike may loom at the next meeting, they soared. Instead, he noted that a series of 50 bp hikes may be what follows. Nothing here said anything clear about the path forward for hikes. Nothing provided vast insight into the economic outlook. So commentators drew their own conclusions.
As stocks soared, pundits assured readers the 50 bp hike and Powellâs subsequent chatter was bullishâit curtailed fears of an even more hawkish Fed ahead. ââIt was a relief rally on the back of the 75s being taken off the table.ââ[i] Another observer argued that despite the big hike, âThe Fedâs messaging, however, helped put investor anxiety at ease ⊠âThereâs a feeling theyâre heading into the right direction,â he said. The central bank, he said, has shown it is taking inflation seriously, but not giving the impression that it will surprise investors with the size of subsequent rate increases.â[ii]
Elsewhere, coverage near-identically argued that in Powellâs speech, â⊠investors found a reason for relief. While the Fed raised interest rates half a percentage point and its chair, Jerome H. Powell, said similarly large increases would be âon the tableâ at the Fedâs upcoming meetings, he shot down the idea that policymakers were considering an even larger move, as some investors had feared.â[iii] Other coverage was even more sanguine, âAll it took was a few phrases in a day otherwise rife with hawkish pronouncements from a central bank bent on subduing the hottest inflation in 40 years. While stocks initially wobbled on confirmation the Fed had pushed up interest rates by 50 basis points, the S&P 500 took off when Powell said an even bigger increase is ânot something that the committee is actively consideringâ for coming meetings.â[iv]
So the market narrative seemed set after Wednesday: The 3% S&P 500 surge was due to the Fedâs dialing back expectations of an even more hawkish approach going forward.
Until Thursday. When stocks plunged at the open and retraced the entirety of the rally, the narrative did a 180°. Apparently, after sleeping on it, markets awoke and decided that, âBy pushing back on a jumbo-hike of 75 basis points in June, Fed Chair Jerome Powell beat back the marketâs most-aggressive predictions for the path of interest rates on Wednesday. However, he may also have inadvertently set the stage for more turbulence going forward. Itâs still a very rocky road ahead, with pivotal economic data and global developments due within days that could seed doubts about the central bankâs approach.â[v] Or that, âMany investors are now questioning how high the Fed might raise rates over the next two years amid soaring inflation and how that might ripple across the economy and corporate profits.â[vi]
Really, of course, nothing material changed overnight. A single event cannot possibly be inherently bullish one day and negative the next. The 50 bp hike we got yesterday was still the same. No Fed speaker had offered further wisdom. The path of interest rate hikes in the future had long been questioned by investors and it is just as unknown today as yesterdayâand just as unknowable as it will be tomorrow (or next month, next year, etc.). Just as they didnât yesterday, few noted today that Fed rate hikes, whether 25 or 50 bps or coming in a fast or slow sequence, arenât the bearish force people presume.
The only thing I see that did change: Market volatility shifted from heading upward yesterday to downward today, re-shaping the narrative in the process. Narratives are fine, but it is important to recall they are opinions, not facts. With that in mind, consider something The Wall Street Journalâs Chao Deng once noted in a 2011 piece for the Columbia Journalism Review:
When reading a typical stock-market story, one that says something like, âFutures Gain Ahead of Obama Jobs Plan,â did you ever think to yourself: âHow do we really know the market move had anything to do with the presidentâs jobs plan? Says who?
Says me. Iâm a markets reporter. Itâs what I do.[vii]
Deng went on:
I wanted a beat with broader appeal. And sure enough, less than three months after the switch [to covering markets], page-views on my stories were soaring. My new-found popularity wasnât because I had suddenly became a brilliant writer. It was because a volatile turn in the markets simply begged for an explanation, sending thousands of extra readers my way. [Boldface ours.]
These words are as fresh today as they were 11 years ago. My take on Dengâs words is this: Sometimes, much of the time, what markets do on a daily basis isnât explicable. So to keep your head, take a longer-term perspective. That is the basic underpinning of legendary investor Benjamin Grahamâs famous quote: âIn the short term, markets are voting machines. But in the long run, they are weighing machines.â It is the wisdom behind John Pierpont Morganâs glib reply when asked his opinion of what the market would do that day, âIt will fluctuate.â
In a sense, this all harkens back to events from 12 years ago tomorrowâ2010âs âFlash Crash,â which struck amid the 2009 â 2020 bull marketâs first correction. On May 6, 2010, a sudden midday drop and recovery, all coming within about 45 minutes, stirred widespread fear. Explanations for what happened ranged from brittle markets worrying over bigger problems (chiefly, Greece), to hackers, high-frequency trading issues, technical glitches and fat-finger trades. But to long-term investors, those were never more than noise. The great irony of the Flash Crash is it came less than 14 months into an almost 11-year long bull market. Overthinking the daily swing was much more dangerous than the event itself, in my view.
The correction we have endured this year, including the past two days, has been trying for many. That is entirely understandable. But it can be a great help either to opt out of monitoring every tick on TV or, at least, to question the narratives so many tell you explain what you are seeing. The challenge we all face as investors during sharply negative periods like those of late is pretty basic: The moves make you feel that matters are of the utmost urgency, when in reality the urgent need is to take a long-term view.
When in doubt, ask yourself this basic question: Will todayâs swings matter much to my portfolioâs returns over my entire time horizon, whether that is 10, 20 or more years? Marketsâ long-term trajectory has always been jagged but up. In bull markets, the good days swamp the bad. How you react to those swings will have much more influence over your returns than the mere fact that these swings happen.
[i] âFed Lifts Interest Rates by Half Point in Biggest Hike Since 2000,â Nick Timiraos, The Wall Street Journal, 5/4/2022.
[ii] âU.S. Stocks Close Sharply Higher as Investors Digest Powellâs Comments,â Akane Otani and Caitlin Ostroff, The Wall Street Journal, 5/4/2022.
[iii] âFed Makes Biggest Interest Rate Increase Since 2000 as High Inflation Persists,â Jeanna Smialek, The New York Times, 5/4/2022.
[iv] âStock Bulls Get Reprieve as Powell Signals a Limit to Austerity,â Katherine Greifeld and Vildana Hajric, Bloomberg, 5/4/2022.
[v] âStocks Crater in Sharp Turnabout After Fed Rally: Markets Wrap,â Rita Nazareth, Bloomberg, 5/5/2022.
[vi] âDow Slides More Than 1,000 Points as Investors Reassess Fed Comments,â Caitlin McCabe and Hardika Singh, The Wall Street Journal, 5/5/2022.
[vii] âMemoirs of a Markets Reporter,â Chao Deng, Columbia Journalism Review, 10/3/2011.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
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