The drama that is the year 2020 continues as President Trump indicates he may return to the White House as early as today. There was the usual media battle over the 'truth' about his condition but it does appear that he is out of immediate danger and improving quickly.
Our job now is to figure out how this event and all the other news events are going to impact the market. ooovidt is a much more complex dynamic than that. Ultimate the best clue of the health of the market is the price action, regardless of what the headlines might be saying.
There are several reasons that we can't navigate the market simply based on headlines.
- The market is constantly anticipating future events. By the time a news event hits the headlines and is well known the market has already assessed it and is looking at what may happen next. Many market players are already trying to anticipate the impact of the election so by the time it actually occurs much of the future will already be discounted.
- Sentiment does not correlate with headlines. Just because the headlines may sound gloomy about something like the growth of Covid-19 cases, that doesn't mean that the market reaction is the same. There is often an inverse relationship and when things sound the worse, it creates a situation where there is a greater desire to buy because of the perception that values are being created.
- Recently the market has been very uncorrelated. Stocks and sectors are not moving in tandem. While the FATMAAN names have been weak, there has been increased speculative in other groups like electric vehicles and select biotechnology. I've been celebrating the robust stock picking for months now and that has not been affected much by headlines.
- The headlines often reflect biases that are at odds with reality. Based on headlines it is hard to believe that the market could do well in the near term. There is a tremendous political battle and shrill warnings about the growth in Covid cases. Even the jobs news on Friday was spun as a sign that a recovery is losing steam. The reality of the economy and the market is not well reflected in what the news media think is most important.
The point is that we always have to look beyond the headlines in order to navigate the market. In the early going this morning, the market is gapping up. That is due in part to the perception that President Trump is recovering faster than expected and hopes that a fiscal stimulus deal will eventually come together.
However, what many market players do not appreciate about this market is that valuations are generally quite good although the FATMAAN stocks are still pricey. Also, there are indications that earnings season may not be that bad. Companies like PepsiCo (PEP) and Bed, Bath, and Beyond (BBBY) have already had positive surprises and there have not been any major warnings so far.
Once again my game plan is to stay focused on stock picking and to not let headlines blind me to the price action. This market is still technically healthy and the likelihood is that many folks are poorly positioned this morning.