Separating signal versus noise is challenging these days because today’s signal is more muddled than ever. One of the more unusual circumstances, which I covered in more detail in the article “Important and Unknowable” is that the immediate past is telling us extraordinarily little about the near future. That is unusual because we can typically estimate the near-term by connecting the dots with reasonable depth and data from the recent past.
One of the reasons why people have inflation fears, currency tremors, market jitters, and emotional vacillation between joy and terror is that all these outcomes seem equally likely that any sense to realistically gauge the directions of these key metrics. We can usually rely upon near-term data to predict the near-term future, and that usually gives us a reasonable sense of comfort about the markets, and how to plan, prepare, predict, and withstand anticipated market moves. But that does not seem to be the case now.
Stock markets are doing well both in the U.S. and Europe after a string of often surprisingly strong earnings, even though investors in Asian equities show more caution as the Delta variant spreads. US and European stocks are up significantly this year and the return generated by equities would qualify as stellar performance in any year. But, it’s challenging to see the rationality in this given so much uncertainty regarding a reasonable economic recovery coupled with the increasing pervasiveness of the pandemic’s reemergence.
Markets are supposed to hate uncertainty, but apparently, the market is happy to look past what it still views as a temporary setback to otherwise robust growth. Can that really be the case? My view is that up, down, or sideways, brace yourself for a very bumpy ride – and dust off those proprietary trading algorithms. But the year has only just passed the halfway point. Look ahead to the fall and more uncertainty and volatility will develop. Once we get past summer’s traditional thin trading volumes, and the strong second-quarter recovery that was powered by broadly successful vaccination campaigns, trouble is lurking in the path forward for the market seems anything but smooth.
The pandemic has not really gone away, and new disruptions to the world’s supply chains are likely to emerge with increasing regularity. To illustrate the sudden and negative impact we expect to see for at least the remainder of this year and into next year happened just this week in China. One of the world’s busiest container ports in China has just been closed indefinitely after a worker was diagnosed with coronavirus. This is just the latest example of the unpredictable bumps that lie ahead. It will add to supply-chain disruptions, exemplified by the global microchip shortage, and Beijing’s proclaimed zero-tolerance on the virus could lead to other similar decisions. That is almost a certainty and will be as well as more frequent.
Thus, extreme and unpredictable volatility is the best prediction for the near term. Past earnings matter for markets, but so does the health of the global workforce. More disruption lies ahead, which means more transitory price volatility and more uncertainty about that volatility, its duration, and its overall economic impact. Of course, that will only add more to market volatility, creating a loop of uncertainty that we are not going to be out of for some time to come.
Prepare, withstand, and profit from volatility. Predicting is reasonable if a clear signal can be understood, but today there is far too much noise.
