Are the markets getting it wrong?

The most valuable lesson we draw from the pandemic is that the market should not be questioned: it is much more correct than those who insist on the contrary.

The doomsayers have screwed up dSince the end of the fleeting 2020 bear market unleashed by confinements. They questioned the continued rises as infections and restrictions advanced. “The market doesn’t know what it’s doing!” They cried over and over again. Later protested the initial leadership of growth stocks compared to those of value: an “error” that, according to them, would correct the deployment of vaccines.

Global equities Again “wrong” by overlooking controversial 2020 US elections and the attacks on the Capitol. Another supposed “mistake” was its revaluation during the winter confinements and the appearance of the delta variant. The rise in the stock markets and the ridiculous rates of fixed income “were wrong” with the ECB’s quantitative expansion programs and the rebound in inflation in Spain. It also failed to understand supply chain issues or labor shortages. And that’s not to mention the omicron variant …

This is all nonsense. Market volatility can seem illogical and inefficient for the foreseeable future, as bubbles and panic episodes demonstrate. So believed, for example, the famous investor Ben Graham, who compared the operation of equities to a voting machine. But nevertheless, over longer periods, fundamentals prevail, with logic and efficiency, to investor sentiment. And this is how the stock markets have behaved since the outbreak of the coronavirus, incorporating into quotes the facts that emotions do not see.

Change perspective: suppose the market is neither irrational nor wrong, but is right and efficient. They may call you foolish, but don’t worry. The History shows that, to operate in the world of investment, this attitude is more intelligent. It is only enough to analyze the latest events from the opposite point of view.

Regarding the sustained increases at the end of March 2020, the Markets rallied rightly from their lows because the cause of the correction (lockdowns) was evident almost instantly. Being such a rare event, the markets incorporated its impact with unusual speed and, in addition, they clearly saw the solution: the reopening. Markets understood that lockdowns would soon be lifted. They were not wrong.

The same happened with him initial leadership of growth stocks. The economy-induced coma did not imply a restart of a ten-year business cycle, but a pause. After this, growth stocks led the increases again, as is often the case in end-of-cycle expansions. TOitself, its large gross margins had helped cushion the decline. This investment style also stood out in the areas that benefited the most from confinements, such as electronic commerce and teleworking. On the other hand, securities, more sensitive to economic cycles, were penalized by their lower liquidity and their credit dependence. Hence, from the lows of March to October 2020, the profitability of world stocks will quadruple that of an IBEX highly oriented to value companies.

Another accurate stock forecast was its little confidence in the rebound of securities that spurred the selective Spanish last fall. Markets understood that the good news from vaccines would not overshadow the advantages offered by long-term growth stocks. To themselvesThey were able to look beyond the US elections as the results ushered in yet another Administration paralysis. that limits their ability to process any extreme measure. TheIBEX’s position in the midst of the debate on a regulation as transcendental as the housing bill did not seem misguided either. given the fragile coalition that Spain leads. The PSOE and United We Can have spent more time discussing the applause and boos of Felipe VI than approving reforms worthy of the name.

Refering to omicron variant, the summer boom of the delta serves as a model for future waves. Do not forget that Markets, insensitive by nature, are not affected by these outbreaks, but by a generalized shutdown of the economy. For this reason, it did not sink with the spread of the delta variant, since it correctly anticipated that the 2020 closings would not be repeated; a still remote possibility today as we get used to living with the pandemic.

Faced with problems in the supply chain, quarterly earnings reports reveal that stocks were back on track as they appreciated. STOXX 600 and S&P 500 company earnings shattered expectations as gross margins remained strong in a context in which the technology and communications services sectors pulled the bandwagon around the world. The market saw it coming: proof of this is that, since mid-May, growth has been winning by a landslide at value.

On the subject of inflation, as much as consumers hate it, its ability to set prices allows companies to maintain margins even if the CPI rises, making equities a great hedge against this eventuality. Nor is it a “mistake” that the returns on fixed income are low. Temporary supply difficulties fueling inflation will subside once we overcome this exceptional escalation. In fact, in Spain this inflationary trend has slowed down, going from 1.6% month-on-month in October to 0.3% in November.

Finally, given the slowdown in the purchase of assets by the ECB, lEfficient markets know that the same scenario that occurred in 2017 ended up being positive for stocks. Trust your judgment.

The exchanges continually analyze these and other issues, discounting the probable scenarios in the prices. These are the best possible indicator. I encourage you this holiday season to take advantage of the “wisdom” of the markets and hear what they have to say for 2022.