Tudor March 2022 Commentary
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Markets Pre-Price Everything

The next time you think you know something that the market doesn't know, give that some serious consideration. Gallup polls estimate that 56% of the American public own stock in some form, suggesting that there are 185 million stock owners in the U.S. That's a lot of folks keeping an eye on financial news.

Although it may occur from time to time, insider trading is illegal. Companies are required by law to distribute their information via designated channels to assure equal access to information. This is why, by far, most financial information is readily available to everyone.

In the current era, both business and non-business news is instantaneous and available from multiple sources - television, radio, newspaper, magazine, the internet generally and social media specifically. Millions of investors have access to this information and then take their own self-determined investment actions based on this relentless flow of news. Investors and computer algorithms are consistently gauging and adjusting their investment posture based on how they interpret this steady stream of news. Some zig, while others zag - all based on the same information. This includes your neighbors and the guy and gal on Twitter.

This constant flow of news is also why in recent months markets had already priced in the probability of war. When invasion occurred, markets then priced in the risks of ongoing war. We're talking decision-making in milli-seconds for some tech-oriented trading firms.

Then, of course, markets priced in the potential for Federal Reserve rate hikes this year, the first of which occurred recently. And then beyond that, how many fed rate hikes will occur in the next year. All of these details are priced into markets before readers get to the "old school" paper version of the Wall Street Journal. If you've read it or seen it, assume that tens of millions have seen the same...and have already acted on that information, which then prices that information into markets.

Whatever you read or see or hear, if it is widely disseminated information, markets have already priced it, which then chips away at the profit and advantage of acting on that information for overall markets.
Back in the Old Days...

Contrast this with news flow one hundred years ago. The ticker tape machine shown above spewed out reams of paper showing stock price changes and company news that would then have to be shared in the next days' paper or by phone call. Corporate financial results would often not be available until quarterly reports were filed weeks or months later, and investors would then have to go to the library to find and peruse that information. Markets were much less efficient in that era.

However, all is not lost in this pricing process. Consider whether all those nimble, fast-acting investors acting on this constant flow of information have profitable outcomes. A multitude of studies confirm that hyperactive market watchers and traders lower their long-term performance outcomes.(3) There is very little grey area here: excessive trading on readily available information is almost always counterproductive. Speed does not equate to better outcomes.

Remember that markets are forward-looking vehicles and care very little about what has happened, and much more about what will happen. And the future they focus most intently on is the next three to thirty months.(5)

If it feels compelling to react to today's news, remember three things:

  1. Frequent trading nearly always lowers returns.
  2. Markets are much more focused on the probability of future outcomes and care much less about historical outcomes. So keep looking forward.
  3. Our view is that mis-pricings (and opportunities) occur most frequently at the individual stock level because individual stocks are inappropriately forced up or down by overall market movements and over-reactions to corporate news.
What Have Markets Done?
This is What we Expected

From last month's commentary: "How do markets most often react to war? Typical market response to war is acute selling before actual fighting and during the initial stages of conflict, followed by market recovery."

This is exactly how markets have behaved during this horrendous 2022 war.

The market recovery phase is evident when we observe that the S&P 500 is 9.6% higher than the day before the February 24th date of invasion.(1)

Is there guaranteed continued recovery? No! Mid-term election years are historically notable for their frothiness in the first three quarters of the year, so with elections on the horizon, expect further declines and gains as the year progresses. After two years of relentless market gains, 2022 will require more patience. And especially so when interest rates are moving and politics is likely to become more contentious in coming months.
Does Greater Economic Growth
Equal Greater Market Returns?
In the 1990's and throughout the 2000's, investment professionals feverishly promoted the idea that investors load up on Chinese stocks to take advantage of the country's awe-inspiring economic growth. With investing, you have to dig a little deeper before taking such recommendations...in hindsight, they were very right about economic growth, but very wrong about stock ownership.

There is no doubt that China has been the most dramatic economic story in history with nearly 1,000% economic growth from 1993 to 2021 spread across a billion people. Contrast that with America's economic growth of 85% during the same period.
However, investing is more complex than simply latching onto economic growth. The Chinese market limped along at miniscule 1.5% returns during that 28 year timeframe compared to U.S. market returns of 10-11% compounded. From 1993, investing in any of the ten largest markets in the world would have left China's market returns in the dust.(4)

In this case, it shows that economics is often disconnected from long-term investment outcomes. It pays to question investment sages when they suggest promising opportunities in the next new thing.
Peddling False Promises
Some financial firms have found a niche suggesting that they have the capacity to expertly mitigate market declines for investing consumers concerned about volatility. Marketing of this nature is an opioid to nervous investors. These firms move to cash or reallocate to "safer" allocations when markets move south. The first question to ask: Has this improved long-term performance?
We know that markets have had intra-year (within the year) declines in every single year of the the last forty-two. This means that every year saw a decline from January 1 levels. In 80% of those years, markets were higher by year-end. Only 20% of the full years ended lower. So what were the average intra-year declines?

Intra-year declines averaged 14.1%. Average full-year calendar declines were 12.2%.

So what does this mean? Significant portfolio changes during the calendar year after declines were a recipe for poor outcomes over that forty-two year period considering 80% of the years were positive by year-end. Aside from the cost of sales and potential tax consequences year after year, selling after a 10% decline would have been wrong 80% of the time and only provided a 2% advantage in the one out of five years that saw full-year declines.(5)

Firms that market these approaches seldom show when they got out and got back in simply because the results are less favorable than staying invested. This becomes a long-term drag on performance and significant cost for investors that buy into this false promise of "safety."

Market volatility is inevitable and normal, but this has never taken away from the stellar returns markets have provided over many decades.
"About the Time You Want to Start Bragging About a Stock, It's Time to Sell."
– John Neff, former Vanguard Windsor Fund Manager
Dow Industrial Index

March 23, 2020 - 18,214 (2020 low)

March 29, 2022 - 35,294 (1)

94% Gain
Enjoy the week...
Grant S. Donaldson, MS, CPA
(1) yahoofinance.com, S&P500 historical data, Barrons, Morningstar.com, Vanguard benchmark returns
(2) Information available upon request
(3) https://www.forbes.com/sites/toddmillay/2016/07/29/how-over-trading-hurts-returns-and-how-to-stop/?sh=46d09eef2ff3
(4) https://www.morningstar.com/articles/1085197/chinese-stocks-the-road-to-nowhere
(5) MFS, Managing the Ups and Downs
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