My favorite questions from clients often contain a bit of a puzzle: “Why is the market doing this seemingly crazy thing?”
We saw this during the March 2020 collapse, when our prior experience during the great financial crisis led us to expect a multi-year downturn. If you looked at it from the right perspective, you could see where those assumptions were off-base. A few months later, the markets had fully recovered from their 34% plunge (and then some). The most common refrain was Mr. Market had become completely unhinged and irrational. (Narrator: They had not).
Now, we see the markets screaming higher after January’s volatility. The temptation to offer an after-the-fact explanation is powerful. Rather than go too far down that road, I am going to offer a few possible ideas:
1. The WFH stocks (see chart above) began selling off 6 months ago;
2. Initial response to CPI data/Inflation and Fed tightening cycle may have been overreactions;
3. The Omicron wave is Receding; conomic reopening/recovery appears to be nearer than thought a month ago.
Too often, a combination of hindsight bias and narrative fallacy combine to create a comforting but untrue or incomplete version of what just happened. I cannot tell you for sure that any of the above is what is going on, but some combination of these three above is as good an answer as any I have heard the past few weeks.
What is your favorite explanation for 2022? Hit me up here with your best rationale…
Was the Pandemic Actually Bad for Companies Like Peloton & Netflix? (Ben Carlson, February 8, 2022)
There’s Blood in the Streets (Michael Batnick, January 27, 2022)
End of the Secular Bull? Not So Fast (April 3, 2020)
Maybe Mr. Market Is Rational After All… (August 7, 2020)
How Externalities Affect Systems (August 14, 2020)
Seeing Red: Is the Heydey of Pandemic Stocks Over?
Source: Visual Capitalist