The Fundamentals Are Sound
February 8, 2018·0 comments·narrative
After a market correction, investors reach for a familiar reassurance: the fundamentals remain sound. But this rests on two unexamined assumptions: that yesterday's price was correct, and that the way other investors think hasn't shifted. Both may be breaking down in ways most investors don't recognize.
• Prices shift around the margins of yesterday's price, which means that stories about market moves become embedded in the next day's starting point. Random narratives, shocks, and fundamentals get baked together without distinction.
• In a game-theory exercise where participants guess 2/3 of the average between 0 and 100, winning answers cluster around 15 to 22, not the mathematically correct zero. This suggests most investors think about what others think, not first principles.
• Central bank communications and always-on media have accelerated a shift toward third-degree thinking: investors now model what everyone knows everyone knows. This shift happened gradually, then became suddenly visible in recent volatility.
• When investors claim the fundamentals are sound after a selloff, they assume how other investors think hasn't changed or will revert quickly. But narratives that shape group decisions persist far longer than individual price corrections.
• If inflation becomes the dominant narrative structuring expectations, the traditional role of bonds as a crisis hedge may not survive the next major drawdown. Few portfolios prepare for that possibility.
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DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
