Daniel Sancho, Head of Investments of MAPFRE Gestión Patrimonial
During April, the Global Equity Index (MSCI World) rose 11.12 percent, the US Equity Index (S&P 500) rose 13.02 percent, the Global Fixed Income Index rose 1.5 percent and the list goes on — developments were extraordinarily positive. We also saw a lot of economic data throughout the month: Unemployment in the US increased from 4.4 percent to 14.7 percent, European GDP has dropped from 1 percent in the fourth quarter to -3.3 percent in the first quarter of 2020. Business confidence rates have reached historic lows and, no matter how hard we try, we will not find any positive macroeconomic data.
Such a scenario suggests that there is something difficult to understand or, at least, not very intuitive. The mass of negative news and data that we began to see in March and that continued during April and May would never have led us to think that it was time to start investing our savings. Even with hindsight, we are unable to give a clear solution, given that the behavior of the market is unfortunately not an exact science and trying to understand its evolution in the short-term is a futile task.
To be able to find an answer or at least gain any understanding when there is such a lack of rationality, we must remember that capital market movements are based on thousands of transactions carried out each day by thousands of individuals and/or companies. What’s more, behind every purchase or sale decision, there are thousands of justifications. Every second, a colossal volume of information and data flows within the capital markets, and it is very difficult to extract valuable information.
At this point, it may be interesting to focus on two considerations that can help us to understand the irrationality of the market in the short-term:
– Expectations: Every individual that decides to invest in the capital market does so with the aim of getting a positive return in the future and with the belief that their choice, given a certain risk, has good growth expectations. On the other hand, if that individual knows that their investment will not go well and expectations are negative, they will sell it as soon as they can. In short, all the decisions on the market are made not in the present but in the future, taking into account forecasts and expectations where there is no guarantee of success.
– Information vs. Knowledge: Today, the huge amount of tools we have to share both data and our opinions has changed our lives, but it has made it tremendously difficult to separate the wheat (knowledge) from the chaff (information), and has meant that many of the thousands of decisions made in the markets each day are wrong. This collection of failed decisions, together with globalization, make the market, in the short-term, a pendulum that is difficult to control and understand.
So why has April been such a good month? The answer remains complicated, but perhaps now a response can be given. The falls we had from mid-February to late March were caused by thousands of decisions based on very negative expectations for obvious reasons. During this period, all the information generated had a tremendously pessimistic bias, which made it more difficult to gain clarity on what was wheat and what was chaff, causing sales to be much higher than purchases. In light of such expectations and such a lack of certainty, the markets suffered one of the sharpest declines in history. In April, the markets surprisingly bounced back, despite the fact that the data published was very bad. Investors, in their drive to discount future events, had predicted an even worse scenario, seeking to correct those catastrophic expectations designed during a highly emotional time.
The example we have seen in recent months has clarified, once again, that the market is always “laughing” at those investors seeking to invest in the short-term, and that choosing the perfect time to buy or sell is a fantasy. However, for those investors who want to make a profit on their savings, they do not need to understand the expectations or know how to separate the wheat from the chaff. They simply need to be clear about their financial situation and the timeframe in which they want to invest. Once that question has been answered, the best time to invest will always be “the sooner the better.”