In A Pig’s Eye

Money has no soul.

There are times when investing is a very callous business. Such times are now when investors must dispassionately assess the investment consequences of the swine flu disease. In this regard, it is advisable to recognize that the economic (and thus investment) impact of the virus as being more systemic than specific*. While selected areas of the global economy will likely be impacted more than others – such as travel, the more significant impact to the markets rests in a rising risk factor via the uncertainty element. Therefore, whenever risk goes up, certain valuation model inputs also rise thereby pushing valuation levels lower. Hence, price declines.

Investment Strategy Implications

Right now, fears of the economic impact from a pandemic are more systemic than specific. In a fragile economic climate with most valuation readings at fair value and technical analysis readings neutral at best, it didn’t take much to tip the stock market balance to the downside. The equation is rather simple – risk (in the form of uncertainty) went up, prices go down.

In a larger context and on the assumption that a pandemic does not emerge, there is every reason to conclude that stocks are close to the end of their short-term run anyway. The tired, old adage “sell in May and go away” will likely be the case this year leaving only the boldly bullish to find the fundamental valuation and technical analysis justification for what has all the hallmarks of a bear market rally and proclaim the return of the bull. Therefore, the coldhearted investment effects of the pandemic fears are more one of timing the ensuing market pause (dip now, rally a bit, make a non confirmation high, then generally flatish for the summer) rather than precipitating a new down wave in stocks.

Now, For Another Soapbox Moment

Once again, like clockwork, the media seems to have concluded that the recent stock market decline is attributable almost exclusively to fears of a pandemic. For those less informed investors, this is what I call the “media mantra” – new news always explains why stocks go up or down on any given day. The accepted media logic to this is thus – professional investors (who dominate the trading activity) with their large research budgets and extensive experience are so naïve that they twist and turn with the news cycle. It’s as though a portfolio manager wakes up each morning prepared to make important investment decisions on the assets he/she manages based on the surprise (news) factor of the day. In my three decades on Wall Street, I know of no asset manager who acts in this manner, yet the media mantra beholden to the news cycle (and, more importantly, advertising revenues) sells this bizarro logic to the general public.

Obviously, there are times when news does move markets – but not without the fundamental and technical analysis underpinnings in place. Therefore, the news becomes the catalyst for the investment circumstances already in place. Otherwise, how does one explain that the media regularly reports that stocks rise and fall for the same reason? (ex. “Stocks rose today because of good news.” “Stocks declined today because investors ignored the (same) good news.”)

*This point is also made by tomorrow's Beyond the Sound Bite guest, David Kotok.