The Disconnect - ValueWalk Premium

The Disconnect

“Davidson” submits:

Q1 2023 hedge fund letters, conferences and more

Trying to locate the relevant criteria in the deluge of daily opinion can easily overwhelm the senses. This morning for instance the initial claims data again disappointed many by indicating economic activity remains strong. The worry is that “the job market will not quit”. High investor pessimism is reflected in the record Retail Money Funds level and low pricing in the SP500. Both indicate many are positioned for recession. This is a positioning that will hurt them if a recession does not occur. The consensus reflects a rising concern that they may be proven wrong. Every economic release produces a mad scramble trying to find the real “Waldo” in a sea of Waldo-look-a-likes.

Traders, who currently dominate market prices, parse the weekly releases for the next trade with a focus on every detail. A wrong step one quarter means the risk of being fired. Each release carries a potential shift of $Trillions. Ignored is the fact that economic reporting is statistical. Every release carries considerable Sturm und Drang*. It seems missed that economics are always estimates, never a precise count. Every release is revised and, even then, still never precise.

*Sturm und Drang: a late 18th century German literary movement characterized by works containing rousing action and high emotionalism that often deal with the individual’s revolt against society

Missed are the long term trends which matter and on which investment decisions should reside. The two charts compare the SP500 with employment and Retail Money Fund levels. “Waldo” is found in the comparison. The observations to be made are 1) high levels of Retail Money Funds coincide with major SP500 lows and 2) rising employment always precedes a rising SP500 throughout history. Periods of high pessimism have always converted to optimism by rising employment. The data shows that fear of a market decline arises from the decline in the first instance. Only after a significant decline do investors fear additional declines i.e., declines in the SP500 create pessimism, pessimism does not predict a decline in the SP500. This relationship has a long history of misinterpretation.

High Retail Money Fund levels and rising employment is a historically strong equity buying opportunity.

Saved Articles