Clearing Out The Noise

By Matt Miller

Just the other morning, as I was getting dressed with a “business news” channel playing in the background, I heard the announcer say: “There are more sellers than buyers in the market today!”

Instantly, I thought, “How misleading! It’s not as if there are orphan stocks out there looking for someone to buy them!”

As someone who strives to help guide your financial future, I can’t help but tune into these messages, which I believe are distorted. Is the media confused about what is actually happening in investing, or are they trying to confuse us? Good question – and one without a good answer.

One of the best things you can do is to inform yourself before acting on any advice. Here’s the first lesson: the financial markets are no different than any other kind of market. It’s a fact that for every seller of a share, there needs to be a buyer for that share. There is no pool of orphan shares waiting for buyers or sellers. Just like in any other market, for a transaction to occur, both the buyer and seller must each believe they are getting a good deal.

Wall Street has been known to paint distorted pictures, and they can cause urgency, panic and rash decision-making. On that same business channel, I also overheard the announcer discussing the current interest rate environment. He explained that when rates begin to increase, stocks will tumble as the cost of borrowing escalates. His prediction might end up being right, but markets aren’t that simple. Markets are constantly digesting all kinds of information, with rising rates being just one element of the financial landscape.

As we always do at SJS, let’s turn to data. The chart below documents the performance of equities during time periods of rising rates.[1]

Data needs to be much more robust than the four observations above for academics and researchers to conclude any kind of statistical significance, but the performance of stocks throughout the time periods shown does illustrate that rising interest rates don’t necessarily have a negative effect on equities.

It’s easy to want to look for that one answer, a singular “cause and effect” – but there are so many factors that can influence a stock’s price. The stock market is the ultimate crystal ball, with a stock’s price representing a vast array of information and the opinions of millions of intelligent market participants. Think about it the next time you get that “outstanding” stock tip at your neighbor’s barbecue. On average, there are more than 40 million trades a day representing more than $200 billion in volume.[2] The majority of these transactions are being done by extremely intelligent individuals who spend their entire lives researching securities. Do you really think the average consumer – or even media reporter – knows something that hasn’t already been factored into the price of that stock?

At SJS, we admit that we have no idea where the market will go tomorrow, but we do believe in markets and the long term historical return on invested capital. Ups and downs will happen, which is why a well-diversified, disciplined, long-term approach is a sound strategy. That’s one of the foundations of MarketPlus® Investing. If you’d like to learn more, or would like some clarity amidst the noise, we are here.

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Important Disclosure and Sources:

[1] Graph source: Dimensional Fund Advisors. Russell 3000 excluded from the 1976-1980 analysis due to later inception date. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Performance data shown represents past performance and is no guarantee of future results. Performance for periods greater than one year are annualized. Instances of rising rates used in analysis are time periods where rates have increased by more than 150 basis points over at least 12 months. For illustrative purposes only. Data sources: The S&P data are provided by Standard & Poor’s Index Services Group; Russell data copyright, Russell Investment Group 1995-2013, all rights reserved; CRSP data provided by the Center for Research in Security Prices, University of Chicago.

[2] Trading data provided by Dimensional Fund Advisors

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