Handicapping the Trade Talks......and the Kentucky Derby

Updated: Oct 28, 2019

The past week has brought renewed volatility to investment markets around the globe. Billions in market value vanish as the slightest negative tweet or when a critical sound bite hits the airwaves, and billions more are created when a glimmer of hope appears. Pundits are busy handicapping the outcomes, with the odds of a positive resolution to the talks gyrating like Elvis with every little snippet. Some investors watch these pundits, strapped into an emotional roller coaster ride as they watch their fortunes rise and fall with the surrounding noise.

As I watch the events unfold with great interest, I ask myself, “Why all the reaction? What makes investors decide that billions of dollars disappear, then reappear, often in the same trading session? Are investors really attempting to bet on the outcome of the trade talks based on what they see on Twitter?”

If so, that would seem a little silly. If you think about it, those tweeting and pontificating on TV, (despite their positions in the government, the trade negotiations, or positions of respect in media) they really (as they always are) new to this game. They have never negotiated a major global trade deal with another economic superpower before…nor has anyone else around, either. They are uncertain of the players, not familiar with the ground rules, and while some have more experience than others in these types of negotiations, none can say they have decades of experience in predicting the near-term outcome of these talks. By comparison, their expertise is minuscule as compared to those that are focused on the art and profession of handicapping horse races.

Think about the professionals that determine the initial odds on a major horse race. In many cases, these people have studied every aspect of the sport for all of their professional career. They not only know the horse, but they know the horse’s bloodlines, where it was born and how it was raised. They know the trainer, and they watch the training process. They know the care and feeding regimen of the horse. They know the track. They know the dirt (or turf) of the track, and how it behaves when wet, dry, or anything in between. They know how each horse reacts to the track conditions. They study how horses perform given different starting gates. They know the jockey…and on, and on, and on. In short, they have access to decades of experience and wealth of competitive information that allows them to make remarkably accurate predictions time and time again as to race results.

Then this year’s Kentucky Derby comes around…and they completely blow it. A horse gets scratched, another is disqualified, and all of a sudden, a 65-1 long-shot, the second least-likely winner, claims the Roses in the “Fastest Two Minutes in Sports”. Despite all of their diligent study, even the best of the best can not consistently predict the outcome of a two-minute race. Even when their research can help them decide on the pool of the top three or four horses, even the pros find it nearly impossible to convert that knowledge into “Hitting the Trifecta” and having their bet pay off. That is, I think, the definition of “gambling”.

So why are investors attempting to make near-term investment decisions based on the comments they see in the media? It would seem they have none of the advantages of the track-side odds-makers, but still, get caught up in the emotion of the daily market moves. In short, in volatile times, many people shift from being “Investors” to becoming “Gamblers”. They ignore time-tested and proven strategies to achieve their goals and allow the media to drive them to make decisions that can be contradictory to their long term goals.

In turbulent times like this, investors often ask what actions they should be taking right now, given the uncertainty in the market place. Most times, the correct answer is “nothing”. Indeed, a well thought out investment plan, with your specific goals and objectives in mind, should already be in place. The volatility we have experienced in recent days is nothing new, despite headlines like “Dow posts worst day since January as trade war escalates”. (msn.com, 5/14/19)

Of particular note, January wasn’t that long ago, and as I type this, the market remains up over 13% for 2019. As we discussed above, handicapping the trade war is rather tough to do…so I’m not sure what value, beyond possibly entertainment, that this headline brings to the investor. Looking at my screen 20 hours after that headline, I see the Dow has gained back over half of yesterday’s decline, though clearly, that could reverse and the first sign of a negative tweet somewhere. Interestingly, the Dow had 7 larger point drops throughout last year. More importantly, this move does not even break into the top 20 of biggest percentage daily declines. Indeed, we haven’t had a day make that list since December 1st of 2008…over 10 years ago. Comparatively, this doesn’t seem like much of a news item, and certainly not worth the hype and concern that surrounds it.

In turbulent times, I always refer back to this chart:

Source: Siegel, Jeremy, Future for Investors (2005), With Updates to 2014 Data is from Jan. 1, 1802 – December 2014

Essentially, stock investments, and in particular U.S. Stock market investments, have delivered attractive and predictable returns over long periods of time. Families should plan for their cash flow needs, develop the appropriate contingency funds, conclude how much volatility they are willing (and able) to tolerate, and then build a diversified portfolio of stock investments to serve their needs over time.

The bottom line is this: Gamblers may wish to try and trade these market swings based on what they see in the media. Investors should not, as the information provided is not of actionable value. Your long term goals are too important, and your long-term strategy too well planned, to second guess them based on a reaction to a tweet. The question then becomes…Why pay attention to the financial media at all? Granted, there may be some entertainment value, but I have heard from my kids that the new Avengers movie is probably a better option-

If you have any questions as to your portfolio design, or would be interested in conducting a “Stress Test” of your current financial plan, please don’t hesitate to contact your advisor and schedule a review.

In memory of our Founder, Myron Bagley.


This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Securities offered through Cascade Financial Management

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