Stocks respond little to the recent past or what might happen in a decade

Since September’s 50 basis-point cut, the US’s S&P 500 is up 2.1 per cent in US dollars, Picture: Getty Images

Question: What do tepid Aussie GDP growth, the US Federal Reserve cutting rates while the Reserve Bank of Australia stubbornly holds, climate change, big tech antitrust battles, and a “baby recession” down under all have in common?

Answer: None can have much real impact on stocks.

You read that right! Stocks are neither myopic nor farsighted. They weigh factors affecting future profitability about three to 30 months ahead, ignoring most super-short-term chatter and all ultra long-term conjecture – even when factual. Let me explain.

Financial commentary is often rife with very near-term events and far-flung, far-future speculation (or fact) … especially if it involves doom and gloom or hopes of huge riches. But nearly none of this directly helps navigate markets.

Stocks care little about the recent past or next Tuesday – even less about what maybe happens a decade out. Endless recent headlines fret the yen carry trade, earnings reports, Australia’s meagre 0.2 per cent second quarter GDP growth, RBA and Fed blabbering, employment reports, daily market wiggles. And, and, and. Maybe that interests you. Or me! But not stocks. Why?

The stockmarket is a marvellous pricing mechanism, blending all available data, opinions and forecasts into a single price – near-instantaneously! Short-term noise usually fades fast into far more accurate prices than anything one could derive alone.

Also, much of headlines’ focus isn’t forward looking. Economic releases reflect the recent past – backward-looking realities stocks largely pre-priced. How results compare to expectations may swing volatility briefly … but just that, and very little.

Consider all the talk of supposedly critical Federal Reserve moves. Since September’s 50 basis-point cut, the US’s S&P 500 is up 2.1 per cent in US dollars – a wiggle that merely extended 2024’s general rise. Hence, further cuts – big, small or none at all – probably prove more hype than substance. Or cause a temporary twitch or two. That goes for eventual RBA moves, too.

Consider, too, all the monthly hoopla around reports such as retail sales, unemployment or inflation. Those reflect prior activity – lagging indicators far from useful in forecasting. Investors from Toowoomba to Tucson obsess over these, but stocks yawn.

Perhaps you can glean something from earnings results or management commentary. But that requires finding something undiscussed – so stocks haven’t priced it – with forward-looking implications. Rare!

Don’t fear anything further out than about 30 months, either. Stocks don’t! Why? The distant future is truly unpredictable.

Stocks deal with that only when the probable effect on corporate profits and sales becomes nearer and more likely.

Take the nonpartisan US Congressional Budget Office’s forecasts. In 2011, the CBO projected 10-year Treasury yields would average 4.8 per cent from 2011 to 2021, with the US dropping $US940bn on annual interest payments by 2021. Reality? The US 10-year averaged just 2.1 per cent over that stretch, with 2021’s net interest outlays totalling about $US350bn. Whoops!

Or, recall early 21st century presumptions of global “Peak Oil”?

Most “experts” posited conventional oil output had peaked. But while government interventions kept Australian oil exploration declining, an unforeseen technology-based fracking boom boomeranged US output into the world’s largest (where it remains) – bouncing about above 13 million daily barrels to drive global production. Long-term predictions are essentially wild guesses. Stocks know that.

Focus has since shifted to peak oil demand. The International Energy Agency claims its arrival in 2029. Goldman Sachs says 2034. Exxon expects constant oil demand through to 2050 – OPEC agrees.

Even if one of them is dead on, none of it affects profitability in the time frame stocks weigh. Ignore it all.

Stocks will, as they do all longer-term phenomena, expectations and fairy tales – like demographics, climate change, the US dollar losing its reserve currency status, and more.
Some may be important sociologically. Some could affect profitability some day. But in the next roughly three to 30 months? No!

Long-term forecasts rest on current information. Over the years or decades it takes them to play out, our world will change unimaginably, like always, negating those forecasts. So maybe Australia’s birthrates continue their recent decline, eventually outstripping migration and dragging growth down as some fear. But maybe not! Or maybe births do keep falling, but new technologies boost efficiency, making it moot. The far future is unknowable.

So, what is the three to 30-month outlook now?

World stocks rebounded swiftly from midsummer’s swoon, proving global recession fears false – bullish. The ASX 200’s parallel bounce shows you that markets see no threat in summer’s big worries, like the yen carry trade or weaker US labour markets. Inflation may not have cooled as much as RBA officials seek, but it has ebbed in Australia and globally. If 2025 doesn’t bring big, unseen negatives, stocks should fare well.

So don’t fret next week or 20 years ahead. Instead, refocus – like stocks always do.

Ken Fisher is the executive chairman of Fisher Investments