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Same Facts; Different Spin

Narratives have a funny way of taking on a life of their own.  In particular, there are some facts that are clear and undeniable, but those facts can be (and often are) interpreted in radically different ways.  Competing narratives can go a long way in explaining the psychological makeup of the people who offer their interpretation of what the agreed-upon facts actually mean.

 

Here are two bits of information that are pretty much agreed upon by everyone.

 

  1. In response to the Coronavirus, stock markets around the world dropped sharply starting in February, 2020.
  2. In response to unprecedented and swift monetary and fiscal stimulus, stock markets around the world hit a bottom in March, 2020 and began a rise that continues to this day.

 

Here’s the prevailing narrative that I have heard over and over again:

“The market overreacted to bad news and is now ‘normalizing’ to a new level that more realistically reflects current valuations”.

 

Here’s my take:

“The market reacted correctly to new information about the impact of a global pandemic in February and has since overreacted positively to the stimulus packages that have been used to counteract the devastating news”.

 

The facts are the same.  Either way, markets went way down and then came back up.  No one is disputing the direction or the causation.  What’s in dispute is whether the move down was an overreaction and the move up a measured reaction… or if the move down was a rational one and the move up an overreaction.

 

As we begin the second week of June, 2020, either story could prove to be the correct one.  No one knows for sure.  My guess is that the latter explanation is likely to be correct.  What I find interesting is that virtually everyone else in the world of finance is steadfastly insisting that it is the former narrative that is correct.

 

Here’s how I propose we keep score.  As of today, the S&P 500 is at about 3,200.  If it is above 3,000 at the end of the year, I’ll allow that perhaps the former narrative is the correct one.  However, if the market drops to below 3,000 (a little less than 10% in just over half a year), then it seems that second narrative would be the more accurate depiction of current events.

 

Would anyone care to bet?

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