On the face, this is about the election, but it isn’t really.
Market analysts regularly send commentary to journalists who regularly write about finance and economics. And while there is some divergence of opining, frequently you can find common patterns in many of the emails.
Recently, there has been a deluge of analyst comments bouncing off the walls of the email inbox. Many were saying on Wednesday morning that markets were souring because the election was up in the air. Except that wasn’t the case. Major indexes went up.
As I said, it’s about the election, but it really isn’t. This could have been anything. A tremor in trade relations between two major world powers. Unexpected drops in crude oil pricing. The election is nothing more in this case than an object lesson in the limitations of what the market experts can tell you.
To markets, perceived or even potential uncertainty is unsatisfactory. Those placing investment bets want as much information about the chance of success or failure as possible. As equities are focused on future results, the calculus becomes more complicated than that facing a first-year university engineering student trying to determine the volume of a doughnut.
But the delayed nature of this election is nothing historically, when you consider the 1876 contest that stretched into the Compromise of 1877, otherwise known as the Great Betrayal by millions of Blacks in the South. Or every single election, as the Electoral College members meet in mid-December to cast the actual ballots and even those are subject to count and possible challenge by Congress early in January.
Despite all the political and financial media, pundit, and expert nail biting, markets have been quite happy over the last few days. According to data from S&P Capital IQ, the S&P 500 index was up 1.8% between Monday and Tuesday and then 2.2% from Tuesday to Wednesday. For the Dow Jones Industrial Average, the changes were 2.1% and 1.3%. Nasdaq saw 1.9% and 3.9%. The Russell 2000 small cap index jumped 2.9% by Tuesday and was flat on Wednesday.
This looks like a positive reaction. It shows nothing suggesting that markets are worried. Maybe the analysts saw early suggestions in index futures, which were fluctuating. Who knows, they might have written their commentary the previous night.
Then there were the explanations of what’s been happening since it became obvious that markets were comfortable. Tech stocks were doing well because a divided Congress would make it unlikely that they’d face a breakup or interference, although that isn’t clear. Republican and Democratic elected officials have made their anger at the major tech platform companies clear and have moved back and forth over issues of privacy and censorship. To assume that a Google GOOG -0.6% or Facebook would be safe from any action (which could be newly undertaken or continued by a Department of Justice lawsuit) is unrealistic.
Next came assumptions that the response was all about pandemic stimulus, which at least had some basis in fact. Loose monetary practice and fiscal stimulus have skyrocketed during the pandemic. Mountains of money entered the economy and, with interest rates ensuring low yields on bonds, investors want a return, which has meant stocks. But no one has a clue as to when a stimulus might happen or its size.
Analysts know all this variability, but they can’t account for it on a minute-to-minute basis. There are debates among academics and experts over whether the stock market acts like a random walk—a series of coin flips. Some say that over the long run, there are patterns and the market can be predictable to a degree. Others disagree.
In either case—pure random movement with overall economic forces pushing prices up over time or something with patterns—stocks go somewhere over the long haul. They also do on the short haul although, collectively, with far less precision. Indexes go up and down and large percentages of the stocks represented in them do the opposite.
This is why it’s so hard to beat the markets. You’ll likely never know which ones in particular might do well over a given time frame, and you can’t necessarily predict the macroeconomic forces that will shape the track down which they all race.
But the experts and pundits and reporters and politicians all feel the pressure to explain every bump in that road. Human beings have a natural tendency to look for narratives that offer, in retrospect, the story of why things happened. The expected understanding of all things investing, whether realistic or not, is why they’re paid.
Call a broker and ask what happened today, and that person needs to sound informed. The market reporter speaking with a television anchor wants to sound knowledgeable. The pundit is expected to point a finger in the right direction. But so much of what happens is mass psychology and beyond rational description.
Some people are truly canny and have a better sense of the flow. They still all get caught out often. When they do, there’s a scramble to find a solid ground. Chalk it up to human nature.
So, take all of what you hear with a grain of salt. There are no obvious answers, and the explanations might be right or wrong. Instead, focus on the longer run. That’s where the money’s to be made and the bumps and jags fade into a smoother pattern.
This article originally appeared on Forbes.
