DATA QUALITY AND HUMAN NATURE

by | Jul 1, 2022

It’s been another interesting week in the world. I mentioned previously that irrational investor behaviour can take markets higher and lower than they should logically be. As I have been combing through data this past week, I have been simultaneously irritated and enlightened at what the Google news algorithm has been sending me.

Consuming data without considering the quality of the data.

This week I have seen more headlines popping up with sensationalist themes that I can remember. This term is referred to as “click bait” somebody will put out a provocative headline to draw readers to engage with the article. I generally make a note to scan for who is writing the article to get a sense of the underlying legitimacy. The amount of seeming unqualified entities writing about the world, economy and markets really caught me by surprise.

A word of caution to investors:

Try to be aware of the nature of the data one is consuming and the objective quality of the data. It’s not unforeseeable that if you are prone to clicking on an article with a negative slant, the algorithms that run the social media and search engines, may just feed you more of the same. This means that instead of getting a balanced view, you may be fed overly negative information and end up drawing the conclusion that things are worse than they are. This sort of negative bias creates can and does drive investor behaviour. If people end up fearing the worst, they may sell their assets into the market and end up being consumed by those searching for cheap assets during this time.

Some encouraging news from large players in the industry.

I prefer to source my data for those have been through multiple market cycles and those with a lot of “skin in the game”. JP Morgan released a note to the market and yesterday. Business insider news correspondent Matthew Fox, noted the following.

Investors should brace for strong returns in the stock market during the second half of 2022 as the US economy avoids a recessionJPMorgan said in a note on Thursday.

The bank’s confidence stems from its view that the annualized inflation rate will get cut in half in the second half of the year, to 4.2% from 9.4%, which would “allow central banks to pivot and avoid producing an economic downturn,” JPMorgan’s Marko Kolanovic said.

Such a sharp decline could be driven only by a cease-fire between Russia and Ukraine, which JPMorgan expects in the second half of the year as the economic costs of the war become fully realized for many countries, including Russia. Falling inflation would be welcome for both investors and consumers after pent-up demand and supply-chain disruptions from the war and China’s COVID-19 lockdowns helped drive 40-year highs in inflation.

Not only does JPMorgan not expect an economic recession to materialize anytime soon, but it expects a reacceleration in global economic growth, the note said. “While the probability of recession increased meaningfully, we do not see it as a base case over the next 12 months. In fact, we see global growth accelerating from 1.3% in the first half of this year to 3.1% in the second half,” JPMorgan said.

It said much of that growth would be driven by China, whose economy could grow by as much as 7.5% in the second half of the year, as long as lockdowns don’t resume. That strong growth would trickle down to other emerging-market economies, the bank said. JPMorgan’s view that no recession will materialize is a far cry from what most Wall Street banks are saying; in recent weeks Deutsche Bank, Citi, and Wells Fargo have put the odds of a recession at about 50%.

The case for strong stock-market returns for the rest of the year hinges on avoiding a recession and is compounded by the fact that many asset classes are trading 60% to 80% below their highs, essentially pricing in a deep and prolonged economic downturn, the note says. On top of that, investor sentiment and positioning are at multidecade lows.

“So it is not that we think that the world and economies are in great shape, but just that an average investor expects an economic disaster, and if that does not materialize risky asset classes could recover most of their losses from the first half,” Kolanovic concluded.

The conclusion and take away:

We are in a challenging point in recent history. There are push and pull factors.

  • The market, countries and the global economy wants to move forward. These are the push factors that create positive market movement. There is a very big underlying desire for this to happen and all the stakeholders are working for this to materialise. It’s only a matter of time before this takes place.
  • The pull factors that keep the markets and economies in lull are the obvious factors, the war, and supply chain issues resulting in higher than normal inflation, which are causing bankers to put up interest rates.

The example I’d like to give relates to the oil price. I’m oversimplifying it, but I hope it serves the point.

  • Russia one of the top oil producers in the world and they are near the top in oil supply into the market. Due to sanctions, their oil isn’t reaching the broader market through the usual channels.
  • The other major group who supplies oil is OPEC.

The world is experiencing an oil supply shortage, which means price goes up. Instead of OPEC and other smaller suppliers upping their game and supplying more to into the market to meet the higher demand (meaning they make more sales and therefore more money, but which keeps prices stable), they also tighten the taps to drive up prices even further. Why? Because they can supply less oil at a higher price. So, there are essentially less goods for more money and they know people have little power to do anything about it. Essentially greed.

How do similar dynamics potentially affect us in the investment world? My personal opinion is to avoid sensational negative economic news. The media world knows very well that negativity attracts attention. The problem with an oversupply of negativity is that it creates an untrue bias. I don’t think it’s out of the realm of possibility that major investment corporations fuel fear to soak up cheap assets from fearful investors, only to resell those assets back into the market at higher prices down the line. There has been far more corporate manipulation that that before. I can’t point any fingers, but I wouldn’t be surprised if this was going on behind the scenes to a degree.

The lesson we can take away from this to stay the course for ourselves and to not be drawn into the fringes. We don’t want our assets to entities trying to pick up a bargain. It makes logical sense to ensure that we get fair value or a better value for our assets when the time is right. This is the same game everybody is playing and there can only be two real outcomes.

  • Those buying low and waiting to sell high. (Most fund managers for example, and successful private long term investors)
  • Those who sell cheap, and buy high, or miss the upswing and have to wait for the market to become cheap again. But that might be years from now. Money market is giving 4.75% last I checked, South African cost of living is now at 6.1% per year. Electricity, petrol, food, medical aid, education is way higher than 6.1% increases and we consume these on a daily basis. So where are people going to invest to try make up the gains to cover these high costs?

Inflation is a large risk, and people need to give themselves the best chance to stay ahead of it. Shares in the stock market, generally are the asset class that produces these outcomes over the long term. When we encourage investors to stick with equities through the highs and lows, it’s because we know that we need to try stay ahead of inflation, which is a real risk.

Let me end with a quote from arguably the world’s most successful investor, Warren Buffett.

When commenting on a previous market downturn event. Buffett notes, “Remember, though, that as some investors exit the market, others enter. The stock market is a device which transfers money from the impatient to the patient.”