The last market update discussed how we were positioning for higher highs even after the “V” shaped recovery from the March lows. There remains a huge amount of disbelief in the strength of this market, but as long as the internal indicators and the ultimate arbitrator, price, are saying there are more buyers than sellers then we will ride the wave higher.
Saying “price” is the only thing that matters sounds glib and too simplistic, but when you think of price as an aggregate collection of all available information combined with human behavioral quirks then it starts to sound more like an AI output to an immensely complicated question. Stock prices operate according to collective logic not to any individual investor’s beliefs and expectations or even manipulations. Many investors often assume that certain events like war, inflation, elections, interest rates, or valuations should strongly affect stock prices and even get very frustrated when the market reacts differently. The collective consensus determines how much weight each factor deserves at any given time. Sometimes it’s unemployment, other times it’s inflation, or housing starts, or valuations, or earnings. The one constant is that it’s always changing and trending, but it doesn't matter because it ultimately gets reflected in one thing: price.
Investors, including myself early in my career, confuse being factually correct with being profitable. For many, it just makes more sense to invest in a company that makes money or pays dividends than one that has massive debts and hemorrhage money. But buying an “unprofitable” company and selling it for a higher price does produce real profits that we then can use to buy groceries and things. Even Michael Burry of “Big Short” fame was factually correct in seeing the housing crisis, but his fund was down massively month after month because he was early to the trade and investors didn’t care until they had to. He eventually made money, but most people would have been broke after several months of 60% drawdowns. Markets reflect collective expectations, sentiment, and positioning, not just raw facts. Investors frequently fight market trends because they believe the market “should” care about something else. This usually ends poorly.
Right now, markets are screaming higher. We hear the consumer is dead but Best Buy is up almost 20% today after earnings and say they are moving huge amounts of $7,000 TVs. But it’s not just the high-end consumer participating, the Dollar Tree and Kohls are up nearly the same amount. They say software is dead because AI will do everything, but Microsoft is spiking, as is Oracle, and the whole index has rallied 30% since last month. And next month we will see the largest IPO in history by far in SpaceX. I personally think the valuation is crazy – a $2 trillion IPO. But who am I to judge? The market might push it to $10 trillion in no time, or we will all collectively decide that valuations matter again. Only time will tell, but it will be reflected in the price. The markets aren’t moral and do not rise and fall based on fairness, ethics, or politics – just supply and demand. In the end, price is the final expression of all the opinions, information, and emotions in the marketplace and price is the only thing that pays.