The Chaos Quotient By: Gabriel PotterMBA, AIFA® 2018.12.26

There are two lessons we want to remind our readers.  First, “the market is not the economy.”  Second, “markets prefer stability.”

We’ve repeated these messages many times over the past few years and the past week has been a stellar application of these basic truisms. 

First, let’s consider the US economy broadly.  From a fundamental point of view, the measurable data that we have in front of us is good, very good in fact.  Economic growth, labor, wages, inflation, and profitability are currently in a stable and positive state.  That data represents our measurements of what happened in the past.  However, investors are forward looking and market actions represent their collective best-guesstimate of what’s coming up in the future.  We cannot yet measure the effects from the chaos of the past week, but we can make some educated guesses.  For instance, we know previous government shutdowns have bled-off about 0.2% of GDP growth potential per week and we also know that this third government shutdown in 2018 could easily last until 2019.  So, even though the downward market correction of the past few weeks has not been based on measured data, it is still based on sound, logical conclusion. 

Second, let’s consider stability vs. chaos.  There are diplomatic, economic, and political venues where the economic effects of the recent turnover of policy and staff are harder to predict.  Will Trump try firing Jerome Powell from the top position at the Fed?  Will the series of high-level veteran replacements in the administration cause their policy making process to become even more erratic?  Will the administration create greater enmity between allies and trading partners without seasoned diplomats?  We have no idea and, furthermore, no way of knowing.  We do know, however, that there are many unrealized potential sources of volatility (e.g. more than a dozen ongoing investigations, a partial change in government control on January 3rd 2019) which all decrease stability.  Over the past few weeks, investors finally lost some optimism and ran out of tolerance.  Their chaos quotient is filled. 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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