As an investment professional, the most often question you get asked by social acquaintances and business channel anchors alike is ‘where are markets headed?’ despite plenty of evidence that it is futile to predict stock prices in the short run. Here’s a blog that shows that not only is it impossible to predict stock prices, it is no easier to explain short term stock price movements even with the power of hindsight. John Rekenthaler compares the recent Trump rally to market movements in the 2020 election to make this point:
“Consider the performance of US equities following the election of Donald Trump, on Nov. 5, 2024. The following day, equity prices soared, kicking off what commentators termed “the Trump trade.”
One explanation for the monthlong rally is that investors preferred the president-elect’s business-first approach to Democratic policies. Now billionaires who know how to make money would be in charge, not career politicians. Another possibility is that voters weren’t necessarily celebrating Donald Trump’s triumph but were happy that this election, unlike its predecessor, was quickly settled.
The trouble with those claims—which have been widely believed—is that stocks rallied much further after the 2020 presidential election, when (1) the winner was indeed a career politician, (2) he defeated one of those billionaires who are said to be good for stock market prices, and (3) the outcome was unsettled for days.”
He refers Benjamin Graham’s famous voting machine vs weighing machine analogy to explain short and long term market movements i.e, in the short run, markets are driven by its participants’ sentiment which is impossible to know even in hind sight and are driven by corporate profits and dividends in the longrun which with research, we can atleast attempt to have a handle on. He goes on to illustrate with a chart how US markets have broadly tracked profit growth and dividends in the long run. However, the chart also shows that the PE multiple has risen since the 2008 global financial crisis.
“The voting machine operates over extended periods, too….As we have seen, though, equity shareholders needed no assistance to prosper. The key to their success was corporate America’s achievement. The rest was a bonus. The dividends that US companies paid, plus their increase in earnings, provided ample compensation for common-stock owners, no matter what the workings of the voting machine.”
He ends the blog applying the concept to Bitcoin and its rally:
“Can Graham’s tenets explain that performance?
The answer: clearly not. The weighing machine has nothing to say about bitcoin, because it neither pays cash today nor ever can. The same precept applies to gold bullion, fine art, and pet rocks. That doesn’t mean that they lack value—the history of gold prices emphatically proves otherwise—but rather that Graham’s weighing machine cannot assess their worth.
Whether anybody else can is an open question. Commentators make bold forecasts about cashless assets, just as Charles Barkley does about NBA games, but their predictions strike me as equally (in)valid. Bitcoin will bitcoin, just as gold will gold, land will land, and fine art will fine art. I know not how and where those needles will land—and if somebody truly does, I know not how to find that person.
Which, no doubt, would also have been Mr. Graham’s answer.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
