Rumors Are Mirroring Stock Market Worries

Editor's note: The markets and our offices are closed on Monday, May 30 for Memorial Day. Please look for your next issue of Altimetry Daily Authority on Tuesday, May 31. And from all of us at Altimetry, enjoy the holiday weekend!

There's a basic law of rumors...

Research from the past 80 years tells us that rumors often reflect or amplify people's fears.

In fact, one theory holds that the power of a rumor is based on two factors. The first is how important a topic is to the individual. If it's not so important, the rumor just doesn't take flight.

The second factor is ambiguity. If it involves strong facts and figures, it's more difficult for a rumor to spread.

I've fielded a number of rumor-inspired questions recently...

I was in Central London this past week, and I'm happy to report that the city was abuzz. From Heathrow to the Tower to Piccadilly Circus, the city looked as though I could have been transported back to 2019.

While I was there, I conducted a seminar at a university. I gave the same presentation that I mentioned a few weeks ago, called "Stock Markets and Crises 2022." If you need a refresher, it's about how investors must look past the correction to keep building wealth.

This time, my audience was British, pan-European, and beyond. And one thing struck me as I was fielding questions...

I was amazed by how similar this crowd's comments were to those from audiences across the U.S. and Asia.

Some of these comments are so similar that they've started to sound more like jokes – or even rumors – than questions rooted in financial research. For example...

1. The yield curve inverted, so a recession is coming, right?
2. The Federal Reserve's quantitative easing ("QE") created a bubble in asset values, and now quantitative tightening ("QT") will burst that bubble.
3. Rising interest rates will sink valuations.
4. The stagflation of the 1970s has returned.
5. Global economic power will shift from the U.S. to China soon.

The financial media loves to play up these ideas, since the resulting fear leads to lots of eyeballs and clicks.

These rumors are repeated the world over as if they were true. But they're not... At least, not the way they're stated.

Of course, the idea of a recession or a stock market collapse is important to pretty much everyone. It makes sense that more rumors are spreading as people become increasingly concerned about their investments falling or other global crises.

And complex concepts like QE or inflation or interest-rate curves definitely lead to a lot of ambiguity – even in the very definitions of the terms being bandied about.

But as I alluded to earlier, there's a way to combat rumors...

I'm talking about using clear, concise data.

Every Monday here at Altimetry Daily Authority, we choose one particular point of focus from our macroeconomic research. Often, we discuss a counterpoint to some market rumor like those I mentioned above.

And once a month in Altimeter Weekly, we highlight the results of our Timetable Investor research on the state of the economy, corporate health, and market valuations.

Our Timetable Investor is the result of more than 20 years of research into the past 200-plus years of macroeconomic patterns... measurable data and metrics... and an ongoing refinement of the best data our teams can access.

And in regard to the aforementioned major rumors...

1. There's one inverted yield curve that does appear to be a strong historical predictor of recessions... and it's far from flashing any warning signals. The media has been referring to the wrong curve!
2. Through Uniform Accounting and Valens Econometrics, we can clearly see that the stock market has risen on significantly higher corporate earnings power. That's more than sufficiently consistent with market valuation increases.
3. Rising interest rates don't kill markets or economies. High interest rates do... And we're nowhere near high rates. Yes, rates rose from a 100-year low to a 50-year low. But that doesn't mean rates are high.
4. Currency devaluation drove the terrible stagflation of the 1970s. Today's rising prices are driven by high demand and insufficient supply. That kind of transitory price increase doesn't create stagflation.
5. The evidence we've shown to the Pentagon and to our top institutional clients is unequivocal. It indicates that in all likelihood, the U.S. economic engine will increasingly dominate the world stage for three to four decades... China included.

Many vital investing skills translate into critical-thinking methods for any topic. After all, great critical thinking means examining data in order to form hypotheses using the scientific method.

Bad critical thinking – from which rumors often originate – involves starting with a conclusion and finding data to back it up. This is what leads to faulty reasoning, both in investing and in life.

So watch out for all those rumors circulating out there... often fanned by the financial media. Instead, focus on strong data and metrics, and allow that information to drive your investing decisions.

As always, I wish you love, joy, and peace,

Joel