In today’s fast-paced world, there’s a common obsession with trying to forecast the future – be it the Federal Reserve’s next move, the upcoming GDP print, or the latest inflation update. The appeal of outpacing the market by predicting these outcomes is exciting, but the reality is far more sobering: predicting macroeconomic events and the market’s reaction to such events is a futile exercise.
Take, for instance, the events of these past three months. The quarter kicked off with global equities reaching new heights, fueled by an improving macroeconomic backdrop. U.S. inflation was steadily declining, international economies were showing signs of growth, and major central banks were easing up on interest rates. Optimism was high, and bullish sentiment dominated investor behavior.
Yet, in a dramatic turn of events, just two weeks into the quarter, equity markets experienced a sharp downturn. The S&P 500 tumbled 8.5% after July’s payroll report fell short of expectations. The same investors who had been chasing equities just days before were now scrambling for the safety of bonds, gripped by fears of a slowing economy. Yet, by mid-August, markets reversed course, rallying to new highs on renewed optimism that the Fed had finally tamed inflation and was poised to lower rates.
For those playing the short-term game, guessing the outcome correctly isn’t enough. Success hinges not just on forecasting the event, but on pricing in these probabilistic outcomes more accurately than the collective wisdom of the market—a nearly impossible task. Markets are complex, driven by countless factors, many of which are unforeseeable. Investors who bet on short-term movements are often left holding the bag, while those who stick with a disciplined, long-term strategy are better positioned to ride out the storms.
The Illusion of Real-Time Insight
Technology has made this guessing game more treacherous. In today’s markets, new information is priced in almost instantly, thanks to the rise of algorithmic trading. These sophisticated algorithms can analyze vast amounts of data in the blink of an eye and execute trades faster than any human could. The efficiency is breathtaking, but it also means that by the time the average investor hears the news, the market has already priced in the information.
A case in point is the most recent Federal Reserve announcement. A week before the event, markets had priced in a 65% chance of a 0.25% rate cut. By the morning of the announcement, this had flipped to a 65% chance of a 0.50% cut, based on the sentiment analysis of Fed watchers and sophisticated models. By the time Fed Chair Jerome Powell took to the podium, the market had already anticipated and priced in the decision. For the individual investor, trying to outmaneuver these algorithms is like bringing a knife to a gunfight.
The Double-Edged Sword of Information and Trading
While technology has undoubtedly made information more accessible, these developments have not necessarily made the pricing of all individual stocks more rational. The rise of commission-free trading platforms has democratized market access, but it has also fueled a surge in retail investor activity, often driven by social media. This influx of emotionally driven participants can lead to significant inefficiencies in certain segments of the market.
The meme stock frenzy is a prime example. Stocks like GameStop and AMC saw their prices skyrocket, not because of any fundamental shift in their businesses, but because of a social media-fueled buying spree. Retail investors, egged on by online forums and armed with commission-free trading accounts, poured money into these stocks, pushing prices to irrational levels.
These episodes highlight a paradox: while markets have gotten quicker at processing information, they have also become more susceptible to short-term swings driven by retail investors. For those who maintain a rational approach, who can resist the siren song of short-term gains and stay focused on the long term, these inefficiencies can create opportunities.
The Election
The temptation to successfully trade the election cycle is high, as a new government can significantly impact markets. A change in fiscal policy can affect bond yields, corporate profits, and currency exchange rates. Decisions on subsidies, tariffs, and regulations will determine which industries thrive and which suffer.
As you might have guessed, we believe it is best to resist this urge. To see why, suppose you put on a trade on the night of June 27th when Donald Trump defeated Joe Biden in their debate. Expecting deficit-funded tax cuts under Trump, you placed a bet that Treasury yields will rise. But other factors always come into play. In the following weeks, as Trump’s odds continued to improve, weak employment data would have caused you to lose money on the trade. Despite correctly predicting the political outcome, other factors would have outweighed its impact. Those playing the “Trump trade” believe a 60% tariff on Chinese imports, plus a 10% levy on other goods, would stoke inflation and push bond yields higher. But the opposite could happen: if these tariffs spark a retaliatory trade war, the resulting uncertainty and economic slowdown could boost Treasuries as a safe haven, ultimately driving yields lower.
The biggest edge in today’s market is not superior information or a faster trading platform, but the discipline to remain rational in the face of market volatility. Successful investing has always required a clear-headed, long-term perspective. In an age where many are distracted by the noise of the day, the ability to tune out that noise and stay the course has never been more valuable.
Razmig Der-Tavitian, CFA, CAIA
Chief Investment Officer & Managing Partner
SLK Private Wealth
