Happy Saturday! I hope your week was awesome!
If we’ve been connected for a while, whether through this newsletter or social media, you’ve undoubtedly heard me talk about the futility in trying to predict short term stock market movements. This week offered up a beautiful example of this, which I thought I would illustrate today.
It was a pretty run-of-the-mill week, leading up to Friday. The S&P 500 was down roughly -2.5% for the week, after the markets closed on Thursday. Not good, but not terrible. All week long, there was anticipation around the jobs report that was to be released Friday morning.
Well, the numbers came in pretty close to expectations. And that calmed fears and made the market happy. After the report was published, the S&P 500 jumped by 1.5% on Friday, to finish slightly up for the week.
The primary fear was jobs data coming in “too hot” (better than expected), which could prompt the Federal Reserve to be more aggressive than expected with interest rate hikes. This explains the -2.5% slide leading up to Friday.
(Remember, interest rate hikes are the Fed’s primary tool to fight inflation. And a hot labor market means more jobs being created and more salaries being paid. Which means more money circulating through the economy. And the definition of inflation is too much money chasing too few goods.)
But if we unpack things a bit, it becomes clear that it is impossible to predict how the stock market could and should react to news like this. Because the stock market is just a collection of people. And people (with all their emotions) can react differently. Let’s take a look at potential reactions for two scenarios: jobs data too hot and jobs data too cold.
Too Hot
- Oh no! Higher Inflation! Bad!
- Yay! More Jobs! Stronger Economy! Good!
Too Cold
- Oh no! Fewer Jobs! Weaker Economy! Bad!
- Yay! Lower Inflation! Good!
This is why I always say that my short term forecasts never impact my long term investment strategy. Short term volatility is not something to be timed. It is simply the price we pay to earn the great long term returns the stock market provides.
I’ll leave the predictions to the talking heads in the media (who are mostly trying to manipulate market movements to suit their needs).
Lastly, since the topic of inflation is not going away any time soon, I will leave you with some stats. Keep these in mind the next time you hear somebody fear mongering about higher inflation or interest rates…
The median inflation-adjusted return of US stocks over the two years following periods of high inflation was nearly identical to the two-year return after periods of lower inflation (18.5% versus 18.7%, respectively). This was researched by Nick Magiulli, in his book “Just Keep Buying.” If you’re interested, Nick also has a really good blog that I like to read: Of Dollars and Data
That’s the latest on my end. I hope you have a great rest of your weekend! And, as always, please feel free to reach out if you have any questions or feedback.