Stock Market Predictions: Why You Should Ignore The Headlines
On October 13 2022, the S&P 500 made an intra day low of 3,491.58 (within the first fifteen minutes of the stock market being open). It was a fall of more than 2% from where the index had closed the day before. What had spooked market participants was that prior to the stock market opening that day, the U.S. September CPI had been released. That headline inflation on a twelve month basis was up 8.2% was not good news. The Fed had raised the Fed Funds Rate by a full 3 percentage points since March 2022 and yet inflation was still hovering at levels last seen in the 1980’s. This, market participants interpreted as a clear sign that more rate hikes would be coming from The Fed. The panic in the first fifteen minutes of the market opening was somewhat rational. At that point, the S&P 500 had already fallen 26.74% thus far in 2022, so you could not be blamed for thinking it would go down even further.
Imagine that at that point, in those first fifteen minutes of the morning of October 13 2022, a clairvoyant (play along) comes along and tells you;
that The Fed would raise rates a further 2.25 percentage points over the next twelve months,
that Microsoft would in January 2023 announce an enhanced partnership with OpenAI, a company that created ChatGPT, and working together they planned on developing new AI applications and services for a variety of industries starting with how you search on the internet (and that there was already a working chatbot that looked likely to leave Google eating its dust)
that there would be three large bank failures in the USA, so large, that by assets the banks were ranked as the second, third and fourth largest bank failures in the U.S.A (ever)
that after a comical appointment of a Speaker for The House of Representatives, he would be ousted through a vote of no confidence and for at least 10 days Congress would be rudderless
Now I am an optimistic person, but I also do not throw caution to the wind with how I invest. If you had given me these headlines then, and asked me that knowing this, would the stock market be up or down a year later, I would have been trying to figure out how much lower than the October 13 2022 low, the S&P 500 would go. Between the actions by The Fed being so aggressive with increasing rates and hearing about the bank failures, you would be forgiven for thinking that something would break (or did break)! Hearing that the Disruptors (Google) were now being Disrupted would lead you to believe that for the traditional Tech Giants and their business models “the good times were over”. As for Geo-Political risk, and lack of leadership in politics…
I find it incredible then that with all these risks materialising, the S&P 500 has gone from that low on October 13 2022, to close at 4,327.79 this year on Friday The Thirteenth of October 2023. That is an index that despite all that and more, is now 24% higher exactly one year later! We are by no means out of the woods yet, the Geo-Political risks have escalated, the technology disruption of Generative AI and its impact on the traditional business leaders is an unknown, and The Fed and their next move in terms of interest rate hikes is not a certainty as to whether it has stopped. It has by no means not been a smooth sailing rise of 24% for the S&P 500, but it just fascinates me that knowing the future headlines, does little to help one know what the stock market will do.
I get it, that it is a market of stocks, and not everyone’s portfolio is the market cap weighted S&P 500. If you love stock picking to build your portfolio of investments, and you leaned into payments businesses like PayPal, Block (formerly known as Square) or Adyen your investment a year later is 30%, 17% or 35% lower respectively. If you had invested in the ARKK Innovation ETF, once a darling for those that believed in investing in businesses that are disruptors and innovators of the future, you are up 12% a year later. The ARKK ETF for all its innovation theme, did not outperform the overall market (the SPY ETF). This all serves to remind me that no matter how much research I do and despite how much I know, I still cannot predict the future in terms of where the market will be in a specific time outlook and more importantly, I have zero to little chance of predicting the level it will be in terms of points movement, or price of a stock. Yet some, a lot of them smarter than me, go on television and tell us what the stock market will do.
To go back to the headlines above, from our reliable clairvoyant, let’s look at the ChatGPT example and their impact on Google’s business model. Most will have in some form or other come across AI related news headlines. The disruption of Generative AI, and predictions being made has some excited and some fearing for their own relevance in the future, never mind investing in companies like Google or Alphabet. OpenAI launched ChatGPT on November 30 2022 and the novelty was out of this world, with the application reaching 100 million users in the first two months of being launched. For context, prior to that, TikTok was the fastest to reach 100 million users and that took 9 months. ChatGPT brought a more tangible experience of AI, that the average person could get to play with, and it is an impressive tool that can complete tasks simply by your prompts, ranging from writing a poem, answering questions and summarising documents for you.
While I like the application to learn and feed my own curiosity, I did start feeling like people were getting ahead of themselves calling it “the Google Killer”. I mean, that is possible, but I certainly did not see that as probable anytime soon. Yet late January and early February 2023, people were speaking with high conviction that the end is near for Google (by implication for the value of Alphabet which is the listed entity that is the parent company to Google). I remember asking in one of my group chats, in January 2023, before the Microsoft announcement of their extension of their deal with OpenAI,
“What’s the expectation? People stop using Google Search and default to Bing and advertising revenue for Bing grows at the expense of Google? I don’t get how ChatGPT monetises and it sounds to me like more options are coming in the world of AI”.
A group member was arguing that he thinks people should invest more in Microsoft and reduce their investment in Google and I was trying to figure out his argument about why Microsoft benefits at the expense of Google? The thing is, 9 months later I still don’t get the thesis to be honest. He was not alone with that strong view then. Credit to him though, as I do respect that his view was not saying “Short” Google, or don’t own it, he was just picking who he thought would win the race.
Many voted in line with this thinking. The media was also harsh on Google, fuelling the fire as investors ran for the exits by selling their Alphabet stock. The narrative escalated to a level that portrayed the Google Management team as having fallen asleep at the wheel, and some even went as far as questioning whether Sundar Pichai was the right CEO for Alphabet. It felt like things were going from bad to worse. In February Google’s AI chatbot Bard was launched. There was embarrassment for Google, as what was supposed to be their podium to win back confidence, resulted in a live demo where Bard did not get off to a good start. Yet here we are… On a personal note, while I jumped into using ChatGPT, I did not perceive value that I would benefit from subscribing to the paid for service. Today, I find myself using Bard as a first choice, and tinker on ChatGPT and Bing just to compare and contrast.
Google parent, Alphabet’s (GOOGL) stock performance, despite the negative headlines and continued success of ChatGPT, is not only outperforming the S&P 500, it is outperforming Microsoft (MSFT), the Technology Sector (XLK) as well as the Communications Sector (XLC). It is early days I know, but if you look at the chart, and the purple line falling way below the pace of the rest of it’s peers during February, can one not can say “crisis averted”?
"Google is the 800-pound gorilla in search. I want people to know that we made them dance….Believe me, I’ve been at it for 20 years, and I’ve been waiting for it. But look, at the end of the day, they’re the 800-pound gorilla in this. That is what they are. And I hope that, with our innovation, they will definitely want to come out and show that they can dance." ~ Satya Nadella as quoted via The Transcript in February 2023 as Microsoft made it clear that they were launching a direct attack on Google’s search business with the launch of ChatGPT powered Bing.
Headlines will make your head spin, and knee jerk reactions risk leaving you with regret in time as the dust settles. The markets really are efficient at how fast they price events in, so it is quite unlikely that speed is your edge relative to “the market”. That so called “edge” or “arbitrage” is a thing of the past, when information flowed differently and slower. Today, the efficiency of the markets makes for headlines to be just that, and not so much a leading indicator. The “Think Like A Farmer” slide comes to mind, as it is often used in the context of investing. One of the lines from the slide reads “Don’t uproot crops before they have had a chance to grow”. I think that is sage advice as we all learn to navigate this terrain.