“Davidson” submits:

Have you ever seen the markets do what consensus opinion expected? Not likely!

 

Market news is mostly about markets doing the unexpected; markets go against consensus.Why is that?

 

The answer is pretty simple. ‘Consensus opinion’ already has made its investment. That means that most of the capital ‘consensus opinion’ believes will move into a particular investment theme has already done so. That is why they are talking about it openly in the media. That is what ‘consensus opinion’ means. This tells you where consensus capital is already invested, not where it is likely to go. Market opportunities do not lie with the consensus, but lie where consensus is not. When ‘consensus opinion’ shifts is when the change in investment value, i.e. change in market psychology, occurs. To be more successful in markets then, one needs to be a contrarian, to act more or less opposite to ‘consensus opinion’. Value Investors are contrary-to-consensus investors. By using fundamental business valuation and a security’s relative value to that business, Value Investors have for hundreds of years bought equity markets at the lows and are in my observation responsible for those very lows. This is why the SP500 Intrinsic Value Index which was created using the perspective of Value Investors tracks SP500 ($SPY) recession lows and is useful in identifying significant lows in the SP500.

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Consensus opinion today has several themes:

1)      The Fed sets interest rates

2)      The Fed is ready to raise rates

3)      The economy continues its awful period of under-employment, poor retail sales, little net income growth for workers, income inequality and etc, etc. so on and so on.

4)      The stock market performance from 2009 is without economic support and based on very low, artificial interest rates.

5)      Equity markets will crash if the Fed raises rates and or Greek default will cause the world to see a financial collapse in some unexplained domino-effect.

 

I doubt I have covered all the themes currently floating about, but this list should be sufficient for discussion.

 

Themes 1&2 have no basis historically. Contrary to ‘consensus opinion’ the Fed does not set interest rates. The market does!! I have shown the historical relationship between the T-Bill rate and Fed Funds rate many times in the past. History reveals that the Fed generally follows T-Bill rate trends several months after the fact. While the Fed has had 2 instances of forcefully adjusting rates/credit availability(1937 under FDR and in the early 1980s when Chairman Volcker reversed inflation), the history of the Fed from 1913 shows it to be a follower of market led rate trends and not a leader. It is always possible the Fed may act differently this time around and while I would not ignore this potential, history is not supportive.

 

Themes 3,4&5 have absolutely no basis. Equity markets are fully supported by economic fundamentals. Employment is at all time highs, as are Retail Sales, Vehicle Sales, stock dividends, corporate profitability, personal income and numerous other sound measures of economic activity. In particular, when rates rise the rise comes not from the Fed, but from normal market pressures as investors and corporations sell short term and longer term fixed income assets to seek higher returns in equity. At this point in an economic cycle, rising rates represent demand for capital to make the economy run faster! Rising rates are a signal that investors are selling fixed income to buy equity.

 

Let me repeat this concept: Rising rates are and have always been a signal that investors are selling fixed income to buy equity as they seek higher returns.

 

From my study of history, market driven pressure on rates has always been larger than the Fed influence. It may be different this time around, but I am not willing to bet on it.

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Consensus opinion

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