By: Matt Garrott
The stock market fell back to earth at the end of February as CNBC trotted out its ‘Markets in Turmoil’ chyron. For all its gyrations, as of the end of February the S&P 500 was up about 1% for the year – hardly turmoil territory. Inflation was the scapegoat of the day as fears of increased inflation spurring the Federal Reserve to raise rates is supposedly spooking the market. Driving this inflation is extremely low unemployment which in turn is pushing up wage growth. Shouldn’t that actually be good news?
Experts have yet to agree on the precise cause of the global financial crisis even with the benefit of ten years of hindsight. Knowing this, we find it difficult to draw conclusions on daily market movements and we are even more reluctant to make investment decisions based on the daily narrative of financial entertainment television, especially when that narrative tends to skew negative.
Humans are wired to look for patterns. We seek to establish cause and effect in order to improve our decision making. However, in investing cause and effect are skewed by the irrational actors of the markets. What is good one day may be bad the next for no logical reason.
Many investors still hunt for cause and effect in the markets to give themselves the illusion of control. This gives them skin in the prediction game, magnifying the feelings of loss when the market moves against them and driving further (likely wealth-burning) activity. Investors who recognize that predicting the short-term movement of the markets is impossible and can set aside the urge to gain control, can instead focus on activities that preserve and grow wealth, such as rebalancing or tax-loss harvesting.
