Market Pulse: No explanation needed — really
May 25, 2017
That's what investors should say every time the market makes a big move.
When the Dow fell 373 points on Wednesday, May 17, we were told it was due to the drama coming from the White House. Is that explanation valid? If so, does that mean the recovery over the following three days was a result of White House stability? Many times market moves just happen and can't always be explained.
Consider this: The United States has stopped quantitative easing and the Federal Reserve is slowly raising interest rates. In Europe and Japan, however, rates are still historically low and quantitative easing continues. Meanwhile, the U.S. dollar has lost five percent this year. That's hard to explain.
Let's look at the so-called "Trump Rally" in more detail. The S&P 500 has advanced 12 percent since the election. You were told (by me, too) that the rally was a result of the likelihood of lower corporate taxes and a more friendly business environment.
But as good as our market has been, international markets were stronger. The iShares Eurozone ETF (EZU) has advanced nearly 21 percent since the election! Even the iShares Mexico ETF (EWW), wall and all, is up 18 percent this year. While some say they are also part of the Trump Rally (he is sparking global growth), others say foreigners are "winning" more than we are. Or maybe it's just a bull market.
Can the Trump Rally explain sector movement? Two Trump friendly sectors, coal and steel, are the best performing sectors over the last year (about 50 percent gains). Good. But coal and steel are the two worst performers over the last month. Is their recent decline Trump related or simply profit taking?
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I've always felt sorry for the people who appear on TV to explain market moves throughout the day. In the morning they might give reasons why the market is down, but later in the day they explain why the market is up. I'm reminded of the quote from H.L. Mencken, "For every complex problem there is an answer that is simple, clear and wrong."
Trading the market based on news and political ideology is a fool's game. Today's news tells you what has already happened, whereas the market looks forward to what will likely happen.
Successful investors see what others don't. "There is no alternative" has been the driver for the bull market these last several years. Many didn't get it.
We said interest rates would remain low while most others assumed they'd surely rise a lot (see 3/16/17 column). They were wrong. Instead of attempting to explain what has already happened, keep a watchful eye on what will happen next. That will be more profitable.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.