Reason and Reasonableness Are Required...
February 15, 2025
I looked back at a number of my previous columns discussing the market and the movements of stock prices and market averages. I think the knowledge that was being offered from the experience of being an equity market investor is that market action often gives the impression of being driven by emotions. In fact, the instantaneous reaction to various bits of news, and of more importance here the often only slight deviations from market expectations, is driven by computerized trading algorithms. Still, the frequently outsized market action and reaction looks like there must be some irrational, emotional factor that is coming into play because of how dramatic the moves can be.
As an example, this past week there were reports on the CPI (Consumer Price Index, an inflation gauge) for January. The report showed that inflation came in slightly higher, by 1/10 of a percent, than projected. And yes, it was the second month in a row that that was the case. Still, the annualized rate was reported as 3% which is a long way down from the 9% that it was just a couple of years ago. All the same, the market reacted to the fact that the number was a little higher than expected by immediately dropping significantly while interest rates on government bonds went up.
That kind of market action often then precipitates knee-jerk reactions by day traders and nervous, inexperienced investors. Hopefully, if you have been reading, you no longer fall into any of those categories. Why? Because by the end of the day, prices had almost completely recovered and now, only two days later, are up almost 2% from their intraday Wednesday low. Making abrupt trades, reacting emotionally is rarely a good idea in investing. If you own shares of a company whose price moves around a lot, and maybe that makes you nervous about its valuation, that is a signal to take a closer look at the business, see if anything has changed in the story that attracted you to the investment in the first place. Maybe you will decide to sell it…please just don’t do so in the throes of a dramatic down move in the market because you react emotionally and out of some misplaced fear.
Dramatic declines or surges in prices have often been caused by slight surprises in company earnings or guidance for the immediate future and/or by surprises in certain moves by the Fed or reports on inflation. A slight surprise does not mean that the underlying fundamentals of the economy or of the prospects of a particular company have changed that much. That is why you have to weather the volatility, remain reasonable and see if maybe this is an opportunity to add to a position at a discount or sell part of a position at an exaggerated premium. Be savvy, not a sucker. Understand what you own and why and don’t get flustered by these market overreactions.
My apologies if this seems like a bit of thin gruel today. Regulatory strictures inhibit discussions of individual stocks. Sometimes I don't have anything particularly useful or insightful to contribute. As an offset to the above, however, the link provided below is hardly thin gruel. Marc Rowan was one of a few considered to be the new Treasury Secretary. His interview with Andrew Ross Sorkin of CNBC and the NY Times about the plan he proposed for a revamping of the tax code and the budget is really a good start for a discussion on any plans to bring the national debt more under control. I will never be confused with being a Donald Trump fan. That said, two of the issues that he is being closely identified with – immigration and government spending – are definitely in need of attention and reform. His methods and the actions of his henchmen and delegates are often brutal, cruel, and unwise in many, many ways. That makes it difficult to have a reasonable discussion on the issues and a negotiated response to the problem. Rowan is a smart guy and the plan he discusses with Sorkin about addressing the national debt through tax reformation is anything but a giveaway to the wealthy. It is at a minimum a good start to a meaningful conversation on this matter of government debt. Unfortunately, it is drowned out by all the chaos and misfortune that the administration's initial actions have caused.
It's a long weekend. It'll remain kind of terribly cold where I am... I hope everyone can find some literal and figurative warmth wherever you are and enjoyment with friends and family.