I’ve been around for 35 years in the stock market, and I have seen many peaks and troughs. What I do know is that markets were set up to fool investors, so the golden rule from me is that you should always try to think 1-2 steps ahead and ignore what you see at a certain moment in time because, if you believe in the efficient market hypothesis theory, every piece of news flow is factored into every price. This includes markets as well as stocks. I know this can sometimes be hard to believe, but currently, a machine will process information far quicker than you ever will and act accordingly. Having information that you believe is going to happen that is already in the public domain is not an edge and you’ll likely lose if you base your investment thesis heavily on this.
Several variables are causing the stock market to be very volatile right now. Some of the main causes of economic uncertainty are changes in interest rates, geopolitical tensions, and persistent global health issues. Additionally, the quick pace of technological advancement and the inconsistent reporting of business profitability continue to have an impact on market fluctuations. Additionally, investors are responding to global central banks' policy shifts that attempt to rein in inflation without limiting economic development. Stock prices have become more unpredictable due to this climate, which presents investors with both opportunities and challenges. As I mentioned in a recent talk, there is a duality of market volatility as both risk and opportunity.
The Current State Of The Market
The present market climate is like the circumstances that preceded previous big stock market disasters, according to several market observers. One such catastrophe was in 1987. Rising bond yields, significant debt, widespread market pessimism, and high interest rates are examples of factors that support this opinion. Investors are becoming more anxious about the stock market's stability, and when these variables come together, it can lead to an unstable atmosphere like past crashes. To illustrate how rising bond yields and other economic factors are influencing the present market situation, several experts have made comparisons to 1987. Based on these findings, it appears that the market is going through a phase of increased susceptibility similar to the past, brought on by comparable macroeconomic pressures. Financial institutions have recently issued warnings about investor behavior and market dynamics that are comparable to those right before major market downturns, adding to these fears. Analysts in the market share this cautious view, noting the growing pessimism among hedge funds and their tactical preparation for possible market downturns. The combination of these variables suggests that the market might be in a vulnerable position, like those seen just before major declines or collapses in the past.
Your Psychology Is Everything
I’m always speaking about emotion and the stock market. Heightened emotions when dealing with money will play a major role in your decision making if you are not careful and ultimately, you’ll lose. Be aware that most macro news is bad and bad news sells very well.
Bad macroeconomic news has a significant impact on investors' assessments of individual company ownership. In the wake of such reports, investors grow wary of taking financial risks and may sell off equities they deem too dangerous, in favor of more secure investments. This is obvious now because the pullbacks seem to be more violent. Again, assume the stock market is trying to shake you out of your good investments.
Sectors that are more susceptible include consumer staples and utilities, which may experience an uptick in interest during economic downturns, and consumer discretionary stocks, which may see a decline. As a result of a reevaluation of the companies' underlying strengths and weaknesses, you may feel like selling your holdings. Some investors have shifted their portfolios to include more stable investments because of increased market volatility, which is another impact. Strategic moves towards defensive equities or industries less affected by economic cycles could be considered in long-term scenarios involving persistently bad economic conditions. The cumulative effect of these responses highlights the enormous influence of macroeconomic factors on personal investing choices.
Confusing Markets With Companies
So, with this fear in mind, what should you do?
Buying and selling stocks of certain companies in response to changes in the economy is risky, in my opinion, as a seasoned investor. You run the danger of serious harm if you do this. First, increased market volatility may be a result of macroeconomic news. You risk making rash judgments that don't fit with your investment objectives for the long run if you react to every update. An example of this would be the risk of missing out on future recoveries that could have been yours had you been patient and not sold your stock in reaction to bad economic news. In addition, although they are indicative of the economy, macroeconomic indicators do not necessarily correspond with the success of businesses. While the economy may be in a slump, individual businesses may fare better or even prosper. While looking for signs of growth or resilience in the face of larger economic issues, investors should not lose sight of the fundamentals of companies in favor of macrotrends. Also, it's not always easy to time transactions, according to macro news. The market may have already priced in economic news by the time most individual investors respond, leaving them with the unintended consequence of selling low and purchasing high, the opposite of the optimal investing approach. To sum up, macroeconomic news should not be the only consideration when making trades in certain stocks; it should be closely monitored. Investors will be better served in attaining sustained returns by using a balanced approach that considers company-specific characteristics, in addition to a disciplined investment strategy.
What A True Investor Should Focus On
If you think that your individual stock returns are suffering from your reactions to macro news flow, here are some strategies to help. To mitigate some of the risk, one of the most effective approaches is to diversify one's investments across multiple asset classes and industries. This approach may assist in maintaining a comparatively stable portfolio, considering that returns on economic changes vary across industries and asset classes. Additionally, don't let macroeconomic news influence your investment decisions; instead, concentrate on the core values of the businesses you are investing in. This calls for an examination of financial indicators such as earnings, debt levels, managerial quality, and other factors that have a lasting effect on the financial well-being and performance of an organization.
Fight against market volatility by establishing unambiguous investment objectives and criteria that endure over an extended period. Such guidelines should be precise and long-lasting. Prior to jumping in with investments, you should determine your risk tolerance and investment objectives. A degree of transparency of this nature can assist in preventing impulsive decisions that are insinuated by precise, momentary economic information. Additionally, contemplate the implementation of stop-loss orders, which instruct the sale of a security at a specified price if it declines to a predetermined level. This feature effectively manages risk. This approach can aid in mitigating potential losses by eliminating the need to constantly monitor the market and react to every decline. It is imperative to maintain vigilance without becoming overly reactive, despite the critical nature of remaining informed about the broader economic environment. It is advisable to maintain a general understanding of the potential impact of macroeconomic factors on one's assets rather than relying exclusively on this information to form rash judgments.
Final Thoughts
After many years in the field, I've come to the conclusion that the stock market intentionally misleads and shocks its traders. Preparation is key, not merely responding to what's happening right now. Keep this piece of wisdom in mind above all else. In the years preceding market collapses like the one in 1987, there was similar market volatility due to factors like rising interest rates and geopolitical tensions. Stick to the big picture and use strategies like diversification and a deep grasp of business basics to weather any storms that may come your way. Emotional reactions can cause bad judgment and losses; therefore, it's crucial to be calm and make decisions based on careful analysis instead of hasty facts when it comes to macroeconomic news.
On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
