On October 13, the Labor Department announced the consumer-price index in September would rise 8.2% from the same month a year earlier, on hopes that inflation would fall.
What if you knew, on October 12, what would actually happen in the next morning’s inflation report?
You can bet the stock will tank, with a weak market sure to panic over the news.
You would never have guessed what happened next.
After falling 2% when the market opened that morning, the stock turned almost immediately, shooting for about 3% higher, one of the biggest intraday swings on record.
In fact, US stocks have risen nearly 9% since the morning of October 13.
Maybe people decided that the bad news wasn’t bad enough that the Federal Reserve raised interest rates at its November meeting by more than 0.75 percent already considered inevitable. Perhaps they felt that the bad news was no less bad than their worst fears.
Who knows? What we can know is that even keeping up with the news today will not assure you of being able to make a profitable trade. That’s why it’s so important to stick to a long-term plan rather than chase the latest illusion of certainty.
One of Wall Street’s favorite things is that investors hate uncertainty. Instead, what they hate is for sure.
Think of all the things the market has been certain about recently.
As recently as late July, market participants were convinced that the Federal Reserve, after cranking interest rates this year, was bound to cut them sharply in 2023. Just no one expected it.
Last December, Tesla Inc.’s market value soared by nearly $200 billion in four days, more than the combined market value of Ford Motor Co. and General Motors Co., all on the belief that the electric-car maker’s growth might not be the same. Maybe a small shop. Tesla is down 36% so far this year, which is almost double that year-end size.
In January, in a consensus almost in the form of a chorus line, market strategists were predicting that stocks would gain between 6% and 11% this year. The S&P 500 is down about 20% so far in 2022.
Not long before that, Wall Street was offering so-called quality stocks with high profitability and low debt as a kind of insurance against whatever the economy could throw at you. Quality stocks have outperformed the S&P 500 by nearly 4 percentage points this year.
And just think about the certainty with which gold worms and bitcoin fans were declaring for years that precious metals and digital currency were the perfect way to protect your purchasing power. So far in 2022, with inflation, gold is down 9%; Bitcoin has lost over 50%.
It’s not just small investors and financial professionals who think they can figure out what’s really going on.
Consider the Wall Street Journal’s recent multipart investigation, “Capital Assets,” which uncovered the startling extent in which US officials trade stocks and other assets.
Among these traders, the Journal found that nearly seven dozen senior federal officials, their families or their financial advisors made a total of more than 80,000 trades from 2016 to 2021.
For example, the husband of an officer made more than 9,500 trades in a single year, 2020, involving stocks, options and short sales, or bets that the price of an asset would fall. That is, on an average 38 trade markets were open every day.
There is also an extreme example of what happens when you chase the illusion of certainty. It becomes easier, as you chase the next short-term gain and adrenaline surges through your bloodstream, to imagine that you know what’s coming next.
However markets do not work that way. They do not allow any of us, no matter how smart or visionary, to know exactly what will happen.
Self-control is the key to investment success, but so is self-delusion.
Beliefs that began to feel like eternal truths—inflation is dead, interest rates will stay low for much longer, stocks have no substitutes, giant technology companies will never let investors down, and so on—fly in people’s faces. have been This Thursday, Facebook’s parent Meta Platforms Inc. announced disappointing earnings and lost nearly $85 billion in market value in a single day.
This is precisely the time when investors need to be wary of the next certainty. You don’t need to act on every forecast, and the more certain the prediction, the more doubtful you should be about its validity.
On any given day, any motivator will tell you with a high degree of conviction when to beat inflation, when interest rates should fall, which industry sector is sure to fail or dominate.
That voice of certainty will be backed by a plethora of past data. It will feel reassuring. This will make you feel that you are not alone. This will motivate you to follow it. And it’s all wrong but sure.