Yesterday the market was going to hell in a handbasket. Today, it’s booming back up. Mr. Market just can’t make up his mind. Get the man some lithium.
Ok, the employment report was released and showed 312K jobs were added versus expectations of 184K. Let’s look at that first.
When estimating anything, you start with the current period and project the next period and then the next and so on. The number that is LIKELY to be the most accurate is the first period. In the case of employment, the estimate was 184, but it turned out to be 312. That number is 70% too high and it is ONLY THE FIRST PERIOD being estimated! What if they estimated 3 periods out?!
Suppose you had a personal bill estimated for just about anything you buy. If that estimate was 70% too high, you would be mad as hell. That’s not an estimate. That is almost a pure guess.
Projecting the future is a difficult at best. At worst, it is a disaster. As a value investor, I only look at the future in a broad macro sense and I put most of my “eggs” on the track record of the past.
Will the market continue moving back up? I doubt it, but I have no crystal ball. Wall Street doesn’t have one either. Investors have been moving out of mutual funds and into money market funds at a high rate for the last month and a half.
When 401K investors receive their year-end statements in January, you can count on even higher mutual fund redemptions. That will force portfolio managers to reassess the potential of each of their holdings and liquidate those which were overly optimistic. This will create a self-sustaining process pushing security prices even lower.
There is a reason why economics are often referred to as “animal spirits”. While there are significant quantitative measures and theories in economics, there is also an equal part of “crowd behavior”. And, the crowd is not happy at this juncture.
What should you do at this point? Take advantage of Mr. Market when he is miserable and pick up some sales. Just make sure, you are buying quality. Some things are down for a reason. Others are down because the crowd is scrambling for the door and will dump anything.
Inflection points, like we are currently experiencing, are the times when the most well-known investors made their mark. Will you?
