All told, Wednesday’s equity markets should’ve started with a bang. Companies are hiring more than expected and jobless claims are a tad lower than expected. Yet the U.S. markets started the day lower, driven partly by pressure from Europe, where stock indices fell over 1% across the continent, and on worries that political uncertainty in Portugal and Egypt could spark another crisis. In the case of the African country, worries about oil prices (which spiked over $100 a barrel) contributed to the sell-off. Likewise, yields on Portuguese 10-year bonds rose past the 8% mark–an important psychological figure.
The news is mixed but, all told, there are signs that structural problems in the U.S. economy, especially on the point of jobs, are dwindling. And the U.S. is still a consumer-driven economy, so news that the U.S. trade deficit rose is paradoxically a good thing: it shows Americans are consuming more. Stocks like Wal-Mart (WMT), Target (TGT), Macy’s (M), Apple (AAPL), and really any company whose revenue directly depends on U.S. consumer activity, should see a modest increase as capital flows into those companies that will benefit from better American employment and higher American consumer spending.
At the same time, peripheral stories such as those in Portugal and Egypt should not hinder the market in the long term; Egyptian instability has been with us for a while, and should be priced into the market. Portugal is frankly too small to matter much, especially since the ECB has shown that it is not committed to austerity and is willing to offer liquidity when necessary. Yet the market spooked, and almost everything in the U.S. is down.
Thinking Long Term
Today’s market activity demonstrates one clear thing: your trading hypothesis must be actionable, but not necessarily today. You can take this economic data, ponder it, and come to a conclusion, but you cannot expect your conclusion to play out that day. Markets are slow; they take time to understand all the data, and act accordingly.
This goes against the popular perception of Wall Street as a place where high frequency trading and fast action to make a quick buck reigns supreme. The reality is much more boring. The allure of day trading for a quick buck is powerful, but the reality is that day trading is hard, usually counterproductive, and often more a result of luck than skill. Macroeconomic news needs to be chewed slowly, and trades need to be executed with a much longer term horizon.
A day like today demonstrates how important it is to think long term when studying the market from the top down. Investors need to establish a hypothesis that plays out over several quarters. Like Rome, fortunes aren’t built in a day.