Markets are not as rational as many would like to think. The last 9yrs of economic recovery should stand as proof! Pessimism has reigned and investors have been brought kicking and screaming into stocks with every positive economic surprise being met with grudging acceptance. The JOLTS report(Job Openings and Labor Turnover Survey) this week provided more of the same-see Job Openings & Temp Help vs. SP500. Record levels of Job Opening and Temporary Help levels and much of the commentary was “It doesn’t make sense!” The market shifts a little higher with investors afraid to lose out to this better news.
The way markets respond to economics is shown in the schematic.
Economic(Human) Activity ®®®®®®®®®®®Media Headlines®Market Psychology®Market Prices
(Value Investors) (Momentum Investors)
Value Investors taking a long-term perspective gauge economic activity in the context of market cycles. They buy assets before the economic news or corporate earnings has turned positive. They know human behavior is to work hard, adjust to difficult financial times(as in financial corrections), pick one’s self up off the mat and move ahead. There are tell-tale signs that this is occurring which if one is looking for them, one can see them. Value Investors seek this detail and invest often when many others are still in a panic-sell mode.
Momentum Investors are price-trend followers. They buy the trends as they identify them. This is after Value Investors have caused stocks to turn higher. What truly drives Momentum Investors is unanticipated support from media headlines which drives the price-trend. They keep on the price-trend till the headlines turn against the trend.
When we get data, as we did this week, which the market(which is mostly Momentum Investors) did not expect as in record Job Opening and record Temp Help levels, we have another opportunity for higher equity prices. Positive JOLTS data leads economic activity by up to 24months. We just exited a US Industrial Recession, caused by the strong US$ 2014-2016. US corporations adjusted and are now moving forward. They are beginning to rehire employees they had to furlough. This is now showing up in the JOLTS data. Higher employment produces higher personal income and wider economic expansion. This filters into media headlines with unanticipated positive economic surprises. Investors respond by adding to equity positions and markets move higher. Value Investors get ahead of Momentum Investor shifts by monitoring economics.
It is a simple relationship and not overly dependent on individual security analysis. It is called ‘market psychology’ and builds with successive positive surprises into a herd mentality. It is what it is!
Nonetheless, Value Investors, still perform value analysis on issues with good long-term performance histories such as Danaher(DHR). Within any index, roughly 10% of the issues account for the long-term performance of the index, i.e. performance across several investment cycles. These are not the F.A.N.G. stocks which tend to dominate a particular cycle and then do not repeat. Buying cheaply is the goal of Value Investors with the anticipation that Momentum Investors are likely to drive prices higher once they discover the price-trends and are further spurred by unanticipated financial news.
The JOLTS data signals economic expansion. Once this is converted into media headlines, markets should continue to rise. There continue to be substantial opportunities for capital gains in my opinion.