Andrew Pyle
February 04, 2022
In a world where no one knows, stick with a strategy
I enjoy conversations with most people on the planet, from business owners to professors and from economists to institutional money managers. However, some of my most enlightening conversations come from speaking with clients, especially when we are in times of volatility. This week I had a the pleasure of speaking with someone who nailed it on the head as we talked about the ups and downs of the market since the start of the year. Essentially, it went like this. On days where stocks fell or when they rebounded, the comments made by analysts and pundits on business news were not really different from when she and her husband used to watch these same programs years ago. Different numbers but the same explanations.
The NASDAQ was knocked lower all through January on fears of rising interest rates and waning earnings growth in the tech sector. They rebounded at month-end because many of the large firms were still generating strong earnings and investors began to re-think the view of aggressive central bank tightening.
Then, on Thursday, Meta Platforms (Facebook) delivered disappointing earnings for the last quarter and the first ever drop in subscribers in the company’s history. Over $200 billion was wiped from the company’s market cap and Meta’s CEO, Mark Zuckerberg, saw his net worth decline by close to $30 billion – a 25% hit. While there were company-specific reasons for the market’s reaction, investors still saw a herd mentality take hold, as many other large-cap tech shares fell. That included Amazon, but no sooner were the headlines talking about the worst decline in the NASDAQ since November 2020, that Amazon came out after the close with street-beating earnings. Futures rose overnight as the herd started running the other direction.
As traders turned on their screens this morning, the central focus was on what the US January jobs report would show and the consensus view was that it would be weak, just like the ADP payrolls data indicated on Wednesday. The expectation was for a paltry 125K increase, after the modest 199K gain in December. Instead, the headline showed a 467K increase with massive upward revisions to the previous couple of months. The reaction was predictable, as were the analyst remarks. This data was going to definitely force the Federal Reserve to hike rates and bond yields were going to spike. The herd was moving again.
As my client remarked, “why does the herd keep shifting when no one really knows that is going to happen next?” So true. The combined brain trust of trading desks around the world were looking for a 125K payroll gain at 8:29am only to be proven completely wrong at 8:30am. If highly intelligent market watchers don’t know what is going to happen a minute into the future, how can they possibly know what will happen by the close this afternoon, the end of the month or by the end of the year for that matter? Of course, the answer is no one knows and the humble and honest among us recognize that.
We can have educated views and we can assess probabilities to various outcomes to help steer us in our investment choices and decisions. The first task is to get out of the herd, and we do that by having a portfolio strategy that is based on the client’s risk ability (assets, financial situation and age, to name a few) and risk tolerance. The next task is to assess fundamentals and get away from the noise. For example, how alarming were this morning’s US jobs numbers? Well, when we dig through the report, we find that that the Bureau of Labor Statistics revised payrolls going back to the beginning of 2017 as part of its regular review of seasonal adjustment factors. If we look at the original estimates and compare to what have been released the net upward revision to the level of payrolls (forget the monthly changes) was only 211K in December. Yes, the January gain was still large, but there is also the potential for that to be revised lower when we get the next report in four weeks.
Have the last 24 hours changed anything materially? It depends on you are listening to, but the Pyle Group believes the story hasn’t really budged. Interest rates are still likely to move higher in March in some of the months beyond. The North American economy is still buoyant and consumer demand is probably going to be supported by employment. Some tech companies are feeling the pain of competition (like Facebook), but others are going to keep cranking out decent earnings as the economy continues to grow. But none of those predictions counter the key advise and that is to stick to your disciplined strategy.
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