JUST PLAIN TALK: The market moves in mysterious ways

Buz Livingston
Buz Livingston

In social settings, I refrain from volunteering my occupation. If asked, I confess, then see where the conversation leads. Often eyes glaze over, and I get a "What a nerd" vibe. Sometimes, people tell me about their investment successes, which I applaud. The number of Warren Buffett-like success stories is heartening. But, on the other hand, I wonder if my appreciation of index funds is a Debby Downer.

Then people ask why the market moved up or down. To that question, I don't know. Once I thought I had a clue, but as I get older, the truth is, no one knows; anyone who does is bluffing, or they get lucky. Financial business channels do it to sell advertising. It's show business; grand and glorious prognostications hopefully mean more viewers and more significant ad revenue.

On days the market is up, pundits proclaim, "More buyers than sellers," then flip the script on down days. But that cannot be true; for every buyer, there has to be a seller. If demand is high, then prices rise; it's ECON 101, and vice versa. Another homily is "Don't fight the Fed." Lower interest rates force people into riskier investments like stocks. Lower interest rates spur demand for automobiles, homes, and consumer goods. But markets can fall, sometimes precipitously, even in a low-interest-rate environment.

Some point out higher company earnings prop up stock prices. The 2017 corporate tax cut notion was companies would use the savings for innovation and higher wages. But, alas, most went to stock buy-backs and dividends. Historically, companies plowed profits back into their operations, but in 2018 stock buy-backs hit record levels. Buying back stock is financial engineering, and sometimes the train jumps the track. General Electric (NYSE: GE) is the poster child.

Markets are extraordinarily efficient in processing new information then incorporating the data into prices. But, while efficient, there are a gazillion factors affecting market prices. For instance, something out of the blue, like coronavirus, that no one had heard of gobsmacks the world's economy.

Despite their efficiency, markets can be irrational; the two aren't exclusive. For example, if you plot returns over the last 100 years, they ought to follow the bell curve, but they don't. Instead, we see "fat tails" or more returns than expected, at both the high and low ends.

William Bernstein touches base on both in his new book "The Delusions of Crowds: Why People Go Mad in Groups." People don't invest or react rationally. We are only a few hundred generations removed from our ancestors that roamed the African savannas. In geologic time, that's a milli-second. Jimmy Buffett was more colorful, "Cavemen in blue jeans."

However, one certainty is a non-peaceful transfer of power in the United States will negatively affect stock prices. Currently, the U.S. dollar serves as the world's reserve currency. A loss of trust would shake the foundations of economies around the world.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.