Think the Market Is Wrong? Think Again!

Two years on from the pandemic’s dawn, and its biggest investing lesson remains widely unlearnt: Don’t fight the market! It is right much, much more often than it is wrong—a point you should embrace now.?

Stock market doubters have been wrong at every turn over the 21 months since stocks bottomed in the short-but-painful, lockdown-induced bear market of March 2020. A big rally despite COVID’s spread and persistent lockdowns? “The market is wrong!” Then it was “wrong” that growth stocks were leading off the lows instead of value, a mistake vaccine rollouts would surely “fix.”?

Next stocks were “wrong” to overlook the contentious presidential election and Capitol attacks. “Wrong” to rise through winter lockdowns and the Delta variant’s later surge. Rising stocks and low bond yields are “wrong” about the Fed’s quantitative easing taper and projected rate increases, as well as ongoing elevated inflation. And supposedly wronger still as they power through supply chain catastrophes, labor shortages, vaccine mandate chatter and Omicron lockdown handwringing.?

This craziness must end sometime, surely—no?

No. It isn’t craziness. Stocks are rightly rising. Yes, in the short term, markets can seem quite irrational and inefficient. That is where bubbles and panics seemingly come from. Like investing legend Ben Graham said, stocks are a voting machine in the short run. But in the intermediate-to-long run, they are a weighing machine … sizing up fundamentals rationally and efficiently. And more rationally and efficiently than you and I can. That is what we have seen these past two years, as stocks priced realities few could envision. And most abhorred.?

And, of course, stocks legendarily pre-price all widely known information and opinions, no matter how smart we think we are. The crowd’s information and opinions are always widely known and discussed—hence, priced.

So to get ahead, shift your focus. Assume the market is basically right and efficient, not wrong and irrational, based on widely heralded factors stocks dealt with long ago. People—many very smart people—will call it reckless and foolhardy, but trusting markets’ vision is almost always the wisest, most time-tested way to navigate the market and reality. To see it, just flip all of these events on their head.

Start with stocks’ initial rally in late March 2020. Stocks rightly jumped fast off the low, since nearly everyone could see and understand the bear market’s cause near-immediately—and estimate the associated economic damage. Unusual! There was no uncertainty about the downturn’s main driver. It was lockdowns, full stop. The fallout was obvious instantly. That let markets price the damage faster than ever. It also gave stocks a clear view of what would end the carnage: reopening. Even without a precise timetable from global governments, stocks subconsciously understood a reopening would come before long. With it, they anticipated a sharp-but-fleeting snap back in economic activity. They were right.?

Growth stocks’ leadership was right, too. Putting the economy in a medically induced coma didn’t reset the economic cycle that began way back in 2009. It simply put it on ice, ready to resume pretty close to where it left off soon after lockdowns ended. That meant stocks naturally behaving as they do in almost every maturing expansion, which is when growth usually leads.

Moreover, growth stocks were simply positioned better than value to weather the remaining ongoing issues. Their fat gross margins were shock absorbers. They concentrated in sectors and industries that were lockdown winners thanks to e-commerce and remote work. More economically sensitive value stocks have thinner gross operating profit margins and smaller cash cushions, and rely on debt financing. They face headwinds that few appreciate even now.

Stocks have been no less rational through 2021. Looking past the election was utterly right, considering the relative gridlock the election brought. The Democrats’ edge in the Senate and House are historically tiny—and the party’s infighting, underappreciated in January, is now plain to see. These factors made this legislature among the most do-little in decades, and audacious proposals seemingly die daily. Look how watered down the infrastructure plan became from initial proposals—only about $550 billion in genuine new spending, much of which may never get spent—like President Obama’s infrastructure legislation which never got spent.?It spreads spending over more than the slated five years, considering permitting and construction timelines. Biden’s $1.75 trillion Build Back Better budget plan is another example. Through months of debate, it shrank and shrank, ditching programs and tax hikes alike. And it still didn’t pass! Intraparty opposition blocked it. Stocks knew radical legislation faced a tough road in this government, despite many investors’ fears. They rightly celebrated gridlock all year long.

Omicron, Delta and as-yet-unknown variants? We now have data galore showing Delta didn’t stop the recovery when it supposedly ravaged the Sun Belt this summer. That offers an approximate blueprint for Omicron’s milder wintertime surge in the Northeast and West Coast. That stocks correctly didn’t tank on Delta’s rise should prove beyond a shadow of doubt in the dark and dreary minds of grousers that lockdowns drove 2020’s early-year decline. A smattering of renewed and extended restrictions across various states and countries now lacks initial lockdowns’ surprise power—and businesses have long since learned to adapt.

The supply chain crunch? Q3 earnings reports show stocks were dead right to rise through it. S&P 500 earnings soared far past expectations. Gross margins stayed resilient in all sectors, with Tech and Tech-like Communication Services leading the charge. Bigger and growthier firms categorically did better with supply chain challenges. This, too, stocks already told you about, as growth has led value by a mile since mid-May. Markets knew vaccine approvals wouldn’t erode growth firms’ edge.?

Inflation? Stocks aren’t wrong to rise through it. Note: Inflation is a hot political talking point, but my statement isn’t about political ideology—it is about corporate earnings. Consumers hate inflation, but businesses have pricing power. That preserves margins as prices rise, making stocks a hedge against the initial kinds of inflation hiccups we have encountered. Nor are bond yields wrong to stay low, as high inflation comes from the supply crunch—a temporary factor. After one-off price jumps flow through the economy, inflation should ease as prices rise more slowly off a higher base.

QE tapering? US stocks set several new record highs after the Fed’s November announcement it would start—and did again after December’s acceleration. That shouldn’t shock. Tapering proved fine for stocks in 2013—just as rate hikes in 2015 and 2016 didn’t hinder stocks’ steady climb. Efficient markets know this, too. Trust them.?

Capital markets constantly size up all of these and more, registering the likely outcome in prices. Those prices are the best darned signal there is. So don’t pooh-pooh markets. Instead, show them some gratitude and love for their hard work. And listen closely in the New Year. There is an aged saying seldom heeded: “The Market Knows.” And, thankfully, it knows more than you and I do.