Markets Can Stay Irrational | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Powell Keeps the Rally Rolling

After a strong January, stocks have continued their run into February after a double-dose of Fed Chairman Jerome Powell.

After raising the Fed Funds rate by a quarter of one percent as was widely expected, stocks surged after Powell talked a lot less tough regarding future monetary policy than he has been over the past year.

Then, earlier this past week, Powell had a chance to push back against buoyant markets at a widely publicized interview at the Economic Club of Washington DC. And once again, Powell played the role of stock whisperer – sending the S&P 500 index up more than 1% and the Nasdaq up more than 2%.

In just the first six weeks of 2023, stocks have already returned more than most Wall Street forecasters predicted they would for the entire year.

Our worry is that despite the fact that speculation is alive and well, the underlying fundamentals that will drive stock prices going forward continue to deteriorate. Leading economic indicators have been falling along with corporate earnings estimates. Investors should be careful not to get caught taking on too much risk as emotions create a fear of missing out.

Featured Insight: Markets Can Stay Irrational

There is a famous quote attributed to Great Depression-era economist John Maynard Keynes – “Markets can remain irrational longer than you can remain solvent”.

This is an important idea for investors to ponder. It essentially means that in the short-run (or even the medium-run) markets can (and often do) do anything.

Whether you’re following an individual stock or the broader market averages, price moves don’t always have to make sense. In fact, they often do the exact opposite of what “makes sense”.

Be careful not to get caught in the trap of thinking that you are right and the market is wrong. The market can remain irrational longer than you can remain solvent.

This is why it’s important to follow a disciplined long-term investment plan, and not get sucked into the wild whims of every market move.

Looking Ahead: Data Download

After a flurry of corporate earnings reports the past few weeks, the markets will get to digest a lot of incoming economic data next week

Some of the highlights include the Consumer Price Index, or CPI, inflation report for January, retail sales, industrial production, and several housing-related data points

At this point, it’s hard to figure out if the stock market is looking for strong economic data or weak data. The former keeps the Fed in play, which has been a thorn in markets’ side for the past year. The latter could point to an economic downturn that would cause further deterioration in corporate earnings estimates, which is certainly not a good thing for stock prices.

As it has been for some time, the CPI report on inflation will be the most widely watched number released next week. Unlike some other economic data points, what the market wants when it comes to inflation is unambiguous – lower is better.

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