FINANCIAL MARKET UPDATE 5.11.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

IGNORING THE MARKET’S MOOD SWINGS

Investors tend to allow market movements to sway their investment outlook. When prices are rising, they become more optimistic and view the market as more attractive. When prices decline, they become pessimistic and view the market as less attractive. The question is, should investors allow the market to shape their emotions in this way?

Benjamin Graham is widely regarded as the father of value investing and was a mentor to Warren Buffett. In the late 1940s, Graham wrote ‘The Intelligent Investor,’ which is often considered to be the best book on investing ever written. The book has been updated several times in the ensuing decades, with the most recent version (2003) including commentary from legendary personal finance columnist Jason Zweig (whose content I frequently share in the Hot Reads section). In his book, Graham shared a timeless metaphor for understanding the fluctuation in stock prices. He wrote:

“Imagine that in some private business, you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.”

The stock market plays a critical role by allowing investors to cheaply and efficiently acquire and dispose of ownership stake(s) in businesses. One would assume the market to be a cold and calculating mechanism for matching buyers and sellers at rational and objective prices. This description, however, would directly contradict Graham’s view. Instead, he paints Mr. Market as a bi-polar person who often lets his emotions get the best of him. While the prices he offers are often reasonable, they frequently swing between absurdly high or low levels. Viewing the market as Graham does can be a very powerful tool for investors. Rather than allowing recent price swings to dictate their investment outlook, they can instead chalk it up to the mood swings of Mr. Market. Graham goes on to write:

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.”

At a high level, the most successful investors will invest whenever they are able to do so and will sell only when they need the cash. Of course, it would be great to know at any given point if it was a good time to buy or sell. Unfortunately, despite Mr. Market’s mood swings, stock prices are generally efficient. This means the knowledge that Mr. Market was too optimistic or pessimistic is only known with hindsight.

The key is not getting caught up in the emotion and taking unnecessary action that results in a mistake. Falling prices do not ensure bleak return prospects in the future, while rising prices do not mean things will always be rosy. The latter point is especially important today, as recent sky-high returns have massively elevated investor optimism.

WEEK IN REVIEW

  • Last week the Labor Department published their closely watched Jobs report. Economists were expecting the economy to add 1 million jobs during April, however, the figure printed at a drastically lower 266,000. The shortfall has been attributed to a combination of generous jobless benefits, businesses reopening before schools (childcare constraints), and continued fear among would-be job seekers related to Covid-19. The jobs figure provides some cover for the Federal Reserve’s ultra-accommodative policy stance that has increasingly garnered criticism from some market participants. The fear is that it risks stoking inflation, but the Fed has held firm that it will not tighten policy until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”    
  • According to FactSet, 88% of companies in the S&P 500 have reported earnings as of last Friday. 86% of companies reported earnings that were above estimates, while 76% reported revenues that were above estimates. The earnings growth of companies that have reported 1st quarter results, blended with the estimates for those companies that have yet to report, is 49.4%. This blended rate more than doubles the estimated earnings growth rate as of 3/31/21 (23.8%) and would represent the fastest quarter of YoY growth since 2010 (55.4%).
  • Additional economic data reports to be published this week include inflation data on Wednesday, jobless claims on Thursday, and retail sales, industrial production and capacity utilization on Friday.

HOT READS

Markets

  • April’s Expected Hiring Boom Goes Bust as Nonfarm Payroll Gain Falls Well Short of Estimates (CNBC)
  • As the U.S. Economy Restarts from the Pandemic, Parts of it Are Severely Broken (CNBC)
  • Investors Rush Into ‘Pick-Your-Poison’ Junk Bonds (WSJ)

Investing

  • The Limits of Investing Sanity (Morgan Housel)
  • Want to Get Rich Quick? Who Can Stop You? (Jason Zweig)
  • How to Lose Money When the Markets Are At All-Time Highs (Ben Carlson)

Other

  • How to Use Tech to Capture Your Family History (Wired)
  • A Psychologist Says Parents of ‘Exceptionally Resilient and Successful’ Kids Do These 7 Things (CNBC)
  • Which Rookie Quarterback Will Succeed Most in 2021 (Sports Illustrated)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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