Friday Charts: The market understands

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Financial markets are forward-looking, even though humans usually are not.

It’s fundamentally what makes investing difficult: “100% of the information you have about any business reflects the past,” the legendary Bill Miller notes. “And 100% of the value of that business depends on the future.”

That’s logical enough — but also kind of confusing: How can stock prices remain so unconcerned about the future when, like this week, war breaks out in the Middle East?

In times like this, our natural instinct is to assume “the market” doesn’t understand the news we’re watching.

When stock prices appear to be under-reacting, we think everyone else must be wrong, or asleep at the wheel, or not paying attention.

This, combined with our evolutionary bias toward action, is what makes so many investors act like traders. The fight-or-flight instinct we learned in the ancient Rift Valley has evolved into a trade-or-sell instinct in the modern stock market.

But we should resist that impulse because Marge Simpson is right: The market understands what’s going on. It just doesn’t care.

“Geopolitics doesn’t normally matter much for long-run market performance,” Deutsche Bank strategist Henry Allen wrote in a note to clients this week.

Data from LPL Financial appears to back that up, demonstrating that geopolitical shocks impact markets far less than most anyone would predict in the moment.

Even the worst events are typically followed by full market recoveries within “only a few weeks to a couple of months.”

Yet, we insist on confidently predicting the dire investing consequences of every unfortunate event that comes along.

How often do you hear an investor say, “I don’t know”?

Not very. But we did hear it from the world’s best informed market watcher this week.

On Wednesday, Fed Chair Jerome Powell explained the FOMC’s decision to leave interest rates unchanged by cautioning that, “we haven’t been through a situation like this and think we have to be humble about our ability to forecast it.”

He was talking about the economic situation, but that’s probably good advice for life ones too: Studies suggest that most of the things we worry about don’t really matter.

As for markets, global prosperity has trended relentlessly upwards for decades despite our best efforts to disrupt it with wars, short-term thinking and economically illiterate policymaking.

So I find uneventful market weeks like this one reassuring.

When markets seem surprisingly calm, it’s probably not indifference or ignorance, but perspective.

Let’s check the charts.

Nothing ever happens:

It feels like the world has had a tumultuous month, but you’d never know from financial markets: BTC, gold, stocks and bonds have all been sideways.

Expectations re-coupling with reality?

The “soft” economic data (i.e., sentiment-based surveys) has rebounded back to where the “hard” data (i.e., actual economic activity) is. The hard data is trending down, but in the short-term at least, the economic impact of tariffs and policy uncertainty has not been nearly as bad as expected.

Long-term, the news is usually good:

Scott Grannis notes that the real (inflation-adjusted) net worth of US households has increased by 3.6% per year for decades. “The US economy is an astounding engine of growth and prosperity,” he concludes.

The news aside, things are unusually good right now:

Ed Yardeni characterizes the current mix of inflation and employment as a rare instance of economic “nirvana”: “The history of economic nirvanas with both inflation subdued at around 2.0% year over year and the economy at full employment (i.e., with the jobless rate at 4.0%) shows eight such transcendental experiences since the 1950s, including the current one.”

The class of 2025 is not feeling it, however:

2025 might not be the worst year ever to graduate college — but it is probably the worst relative to how good the economy otherwise is. That might be because AI is doing the entry-level jobs now. Or, as Paul Krugman believes, because political uncertainty has caused employers to stop hiring. Or something else, it’s too early to say for sure. But if you’re in school, consider staying there.

Off to a slow start:

Recent graduates are 3x more likely to be unemployed than the cohort aged between 35-44, which is probably even worse news than it sounds. Krugman notes that the consequences of early unemployment last “basically forever,” citing an NBER study that found that “those who join the workforce in a downturn have lower long-term earnings, higher rates of disability, fewer marriages, less successful spouses and fewer children.” Ugh.

You can’t see it in the data, though:

The Atlanta Fed’s GDPNow model sees Q2 growth coming in at a robust 3.4%. This makes the consensus FOMC projection of 1.4% growth for the full year seem unnecessarily gloomy. Worse yet, the FOMC’s elevated inflation forecasts make it look like they’re expecting stagflation.

Inflation “forecasting” is getting even closer to guessing:

Torsten Slok notes that almost a third of the prices going into the CPI at the moment are guesses. This seems likely to get worse, because as Jerome Powell noted this week, layoffs are making it harder for the government to collect economic data — data that’s “a real benefit to the general public” because it ensures people “have the best possible understanding of what’s happening in the economy, and hence, what’s likely to happen.” As if that wasn’t hard enough already.

There are ever more investors chasing pretty much the same number of stocks:

The US ranks second to Switzerland in average per capita wealth. It fares less well if using the median, but the number of new millionaires is impressive: Bloomberg notes that over 379,000 US residents became millionaires last year — more than 1,000 per day!

And we wonder why the market never goes down.

Have a great weekend, understanding readers.

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