When it comes to integrating data with market insights, there’s no one better than Ben Carlson. I love you today”exception to the rule,” where Ben dives into the neat joke of conflicting data between market action and inflation data:
the bull: The S&P 500 has recovered half of its 2022 market losses. When this has happened in the past, stocks have never returned to new lows and have risen higher each time a year later.
beer: Every inflationary spike has been mitigated by a recession.
“Which ‘always’ will win?” See Ben’s post on how to solve this, then come back here for my spin. I see the inherent conflict between these two points in terms of an excuse to consider a few market truisms:
1. Market action drives narrative (not the opposite).: Reversal price action in the market can be confusing. Add to this the human tendency towards hindsight bias – we believe we predicted what was going to happen, when we had no idea what was going to happen. Dress it up with a little narrative fallacy – our innate tendency to create a storyline to explain what’s going on.
This is a perfect recipe for a fundamental misunderstanding of what the market is doing at any given moment.
2. Contains value information, unless it is not: More precisely, our attempts to explain price action often lead us astray. Sometimes the market—the collective judgment of all participants with capital at stake—can inform us of something important that we have overlooked.
3. Change is permanent: A major challenge for investors is that, although the past may be prologue, everything changes, and history cannot be relied upon as absolute. As Heraclitus observed, “nature is change.” Therefore, investment strategies must be constantly evolved. When market inefficiencies are discovered, they are arbitrated. *everything Comes with an asterisk, even the average reverse.
4. “Never” is a dangerous word: Reflect on the above. Because something that has never happened before is no guarantee that it won’t happen. Same with “always” – just because something has always happened is no guarantee that it will happen in the future. The challenge this presents to investors is that the truth is rarely apparent until it happens.
5. The winning narrative was clear: Sometime in 2024, we will look back on the second half of this year with bemused detachment. The outcome of the debate between bear market rallies and inflation-caused recessions has probably already been resolved by then. We wonder how today’s investors missed such an obvious conclusion in real-time.
“How could they not know that ____ was going to happen? ____was so clean!” Only they couldn’t because it wasn’t.
The future always holds good lessons from the past. They are exactly right about what has already happened. What they mean for the foreseeable future is anyone’s guess.
Exceptions to the rule
By Ben Carlson
Common Sense Resources, 23 Aug. 2022
in the past:
Does the market “know?” (August 19, 2022)
Counter trend? (August 15, 2022)
The Uncertainty Monster (July 21, 2022)
Bull and bear markets