If you know anything about my investing style, you know that timing the market is not part of it. For starters, it is nearly impossible to do. But even if I could do it on a consistent basis, sharing that with others would ruin my ability to do it.
The stock market is simply a large collection of humans, buying and selling stocks. And humans are often overly emotional. And when clustered in herds, we can be extremely irrational. How do you predict human behavior when it so often defies logic?
And even if we are able to do that – and consistently predict the stock market – that means we are able to see and capitalize on inefficiencies in stock pricing. And the more money that piles into those inefficiencies, the faster those inefficiencies vanish. That’s why it’s so difficult to gain access to a money manager that can actually do it. They are ultra exclusive in who they serve, otherwise they would lose their advantage.
This week offered up a great example of how emotional – and, in my opinion – irrational th stock market can be.
The big news this week was, once again, inflation. On Thursday, the highly anticipated monthly inflation numbers were released.
- Headline Inflation (Consumer Price Index – CPI) increased 0.4% in Sept versus an expectation of 0.3%.
- Core Inflation (CPI excluding volatile food and energy prices) increased 0.6% in Sept versus an expectation of 0.4%.
The market took this as bad news. In the morning, before US markets opened for business, Dow Futures dropped 800 points (falling from +300 to -500). And then, the Dow finished the day up over +800 points. What a wild ride!
As inflation is causing historic volatility in the stock market, it is odd how we are focusing so heavily on the negative news. Because there has been a ton of good news on inflation too.
- Inflation has fallen for 4 consecutive months
- World food prices have fallen for 6 consecutive months
- World food prices have fallen roughly -15% from peak
- Oil has been falling since March (roughly -30% from peak)
- Gas prices have been falling since June (roughly -36% from peak)
- Natural Gas is down 30% in the past month
- Baltic Dry Index (global shipping costs) has been falling since October 2021 (roughly -66% from peak)
- Steel prices have been falling since May 2021 (roughly -36% from peak)
- Iron Ore has been falling since May 2021 (roughly -58% from peak)
- Lumber has been falling since May 2021 (roughly -70% from peak)
- Aluminum has been falling since March (roughly -38% from peak)
And this is just a small sample of commodity prices. Many more have fallen as well. Commodity prices are a major driver in the cost of goods. So it certainly appears as though the worst is behind us on the inflation front. And if this is the case, the squeeze on corporate profits will lighten up and we can expect to see a lot of improvement on the earnings front over the next few quarters.
Why isn’t anyone talking about this? I don’t know. Human behavior often defies logic.
Instead of trying to predict it, I prioritize financial planning when investing my money.