Modern Market Dynamics
April 25, 2022
Dear Friends,
Three dynamics of modern markets converged on Friday. They were set into action on Thursday and let loose on Friday. What leads to this conclusion? It rests on two observations: first, nothing in the U.S. or global economic picture changed substantially from Wednesday to Friday and, second, the markets discount or “build in” current events immediately. They incorporate news into price or value levels, as they are known. So, if there is a large move in the markets, it should be triggered by some event in the future economic picture. Let’s review some of the big areas that would trigger such a move and see if they have occurred. If they have not, then it leads to a different source than actual events.
Let’s begin with geopolitics—the big one. Nothing new or surprising happened in Putin’s destruction of Ukraine. No poison gas was detected; no new nuclear threats were made. Just the same destruction he has been engaged in since the invasion began. Macron looked to be the winner over Le Pen in the French elections.
As far as I can tell, Britain is still not back in the EU. North Korea launched no missiles at Hawaii. Iran did not announce or admit to possession of any nuclear weapons. A significant segment of China’s economy was still on lockdown. Disney was still duking it out with Florida. Global supply chains were still significantly slow. Supply induced inflation was still plaguing the world. U.S. inflation was still elevated. The U.S. Federal Reserve still intended to raise the discount rate by 50 bps. The U.S. economy was still growing at an elevated rate and U.S. unemployment was still dropping.
These are all familiar elements of the “post-Covid” world. Unless something new was happening, the somewhat confused and volatile market before Thursday had no reason to sharply sell off.
On Thursday, I attended a meeting with Goldman Sachs where they assessed the markets and Q1 developments. No expectation of a sharp selloff was mentioned or indicated. In fact, their last assessment, from Q4 2021 was still current; with some differences. Their position was that the risks in the financial markets were very close, but fractionally greater than at the beginning of 2022. They made no recommendation to adjust asset allocations or to sell anything.
So, where can we look to find an explanation of the market action we have seen for two days and continuing today?
The volume of shares transacted on Friday on all U.S. markets, as best as I can determine, was in the billions of shares. Yes, that is BILLIONs and billions are not unusual anymore. The financial press attributes all activity, up or down, to “investor” activity. Share volume of this magnitude is not the result of individual investor transactions. Very few people woke up Friday morning and decided that the world had changed and they needed to sell their shares, wreak havoc on their financial plans and hide in a cave.
In my opinion, what did happen is that large institutional investors, brokerage firms and the holders of many trillions of dollars acted to protect themselves without any notice, by selling assets now in order to secure a lower base cost from which to claim greater gains later. They create and implement a strategy that is self-serving. It gives them the opportunity to show larger gains later in the year.
Some evidence of this can be seen in the intra-day volume. During the opening 30 minutes of trading on the NYSE on Friday, volume was 122,406,948 shares. During the next 30 minutes, volume dropped 60% to 50,177,282 shares. Volume continued to drop until 2:00 PM, then rose to 30,596,623 and to 47,726,679 at 3:30 PM. During the last 30 minutes of trading, from 3:30 PM to the close at 4:00 PM the final 30 minutes, trading totaled 477,817,904 shares. The total volume on the NYSE on Friday was 1,000,647,620 shares.[1]
The opening volume was about 2.4X the mid-day increments. In the closing 30 minutes, almost 50% of the entire day’s trading volume occurred. This acceleration indicates that a pre-programmed trading algorithm was triggered—to sell. It is not likely that individual investors waited all day, until 3:30 PM, to enter their sell trades. The automatic, pre-programmed transactions are another method to remove consciousness from investing. To successfully build the value of investments requires that we choose sound companies, serving the needs of real people and that we allow the most important ingredient, time, and our attention to work the magical transformation.
There is much to be said for the shadow side of our advanced, electronic securities markets. The bright side is the increased access they give to individual investors and speculators. This, at virtually no cost for most transactions. The dark side is that this massively increased access and speed, combined with the virtually ubiquitous financial and economic “news” has transformed investing into a mimicry of a global video game or contest, with the “color commentators” and play-by-play narrative that is designed to hold one’s attention in the same way as a sports event. Of course, there are the talking heads from many Wall Street firms and institutions that send their gladiators to unfurl the company colors and vanquish the competition. Oh, let's not forget the “mad man” who screams and yells at all the rest from a self-proclaimed position of omniscience.
What is an antidote to this trivializing of the human labor that brings value, in the form of currency/money/wealth, into the world? Rather than diminish the task of meeting the needs of others, it should be cultivated. If left to the speculators and game players of the money realm, well-chosen investments that support the uplifting of our fellow humans and culture would be ignored. There is little, if any lasting value in the next daily, 24-hour episode of what is better named “The Survival Game.”
As is often the case, there is a purpose and art to investing. The “masters of the universe” of each generation laugh at and ridicule this fundamental notion that investing is assigning a portion of whatever amount of wealth you have, to recirculate by supporting the creativity and dedication of others. By investing, we make it possible to create or discover pathways to our highest good as a culture and civilization. By recognizing that investing in businesses that meet the needs of others, the future for all is improved.
The recent selling and the major disruption of life that Covid and conflict has brought will be replaced. Human aspirations to improve the lives of our families is more fundamental and stronger than the fear that grabs us from time to time.
From all of us at Arista Advisory Group, LLC
[1]. Volume statistics from Barronʻs Advisor, Market Diary April 22, 2022