What Moves Markets, What Doesn't, and How to Tell the Difference

If you take in any financial news, odds are you're wholly familiar with reports on and charts of daily market movement.

You know -- such-and-such a stock, sector or country moved up or down based on this and that underlying cause. Maybe headlines cite earnings, political developments, new economic data -- stuff like that. Superficially, there seems to be a certain logic to it, even though pinpointing specific daily market drivers is generally a fool's errand.

But what about all the important and controversial stuff that seems like it should affect markets? Stuff like climate change. Income inequality. The opioid crisis. These issues affect many lives and garner significant real estate in the papers -- why don't they seem to affect stocks? Because these issues fall in the realm of "sociology," and sociology doesn't fundamentally alter stocks' price drivers: supply and demand.

First, a definition: By "sociology," we're referring to issues that impact our social, political, environmental and other societal relationships. They relate to the economy in some ways, but they aren't expressly economic matters or drivers -- though many public figures argue otherwise. (A fancy term for this is socioeconomics, but that's jargon-y.)

Though important, sociology doesn't meaningfully affect stock supply or demand. Or, more specifically, it doesn't affect corporate earnings -- a key demand driver -- in the next three to 30 months, which is the time frame most relevant to markets. Beyond that, too many variables are unknown.

Let's break down why a hot-button sociological issue like climate change doesn't faze stocks. One side believes climate change is the seminal issue of our time. Some extreme projections forecast San Francisco joining Atlantis under the sea if nothing is done.

More moderate views encourage action to combat climate change, from cutting personal energy consumption to getting involved politically. The other side isn't convinced by the evidence.

On the extreme side, some believe the science is an outright hoax. Others happily admit pollution stinks (pun intended) but have hesitations about straight-line math projections or the infallibility of thousand-year-old temperature "data." Still others agree temperatures are rising but aren't convinced of human culpability or the effectiveness of plans like carbon taxes.

The debate is heated, to say the least, and elicits strong emotional responses. As an investor, though, ask: How will climate change alter the economic, political and sentiment forces that influence investor demand over the next three to 30 months?

Economically, some forecast massive problems, and outfits including the Bank of England have researched whether "stranded assets" (i.e., leaving fossil fuels in the ground to cap rising temperatures) could inadvertently lead to a financial crisis. Yet even these dire predictions don't call for the potential doom to occur overnight -- it's over years or decades, which is far beyond markets' outlook.

Politically, the issue generates talking points, and some states have tried battling it with legislation (e.g., carbon cap-and-trade in California, renewable energy subsidies, fracking bans in New York). Those things can create winners and losers with a potential market impact.

With the Beltway gridlocked, however, the likelihood of sweeping national change appears low for the foreseeable future. Moreover, most climate-related efforts and agreements have largely been symbolic (see the Paris Agreement for more). Sentiment-wise, a scary report could always spook folks in the short term, but people move on quickly. However you feel about climate change, it is very unlikely to affect stock-price drivers.

Same for other sociological issues. Income inequality? As Ken Fisher wrote in Beat the Crowd, "Stocks don't really care who has wealth as long as whoever has it keeps bidding prices higher."

Questions about fairness don't stop bull (or bear) markets. This also applies to the minimum-wage debate, which spurs protests and strongly worded op-eds. Businesses' primary objective is to make money, so if labor costs rise, they'll adjust accordingly (or fail).

Stocks don't weigh whether workers are better or worse off -- or being replaced by robots. They care whether the business remains profitable and what its future profitability appears to be.

What about polarized politics? Hot-blooded, contentious public discourse -- exacerbated by the media -- must worry stocks, right? Not exactly: Words aren't action, and political screaming matches don't undermine the U.S.'s strong rule of law and lasting institutions.

It doesn't mean those institutions or rule of law are invincible, but more polarization hasn't upended the current system, which markets have liked just fine. Heck, it seems most like a symptom of bullish gridlock.

Even more immediate, tragic problems like the opioid epidemic don't roil stocks because the economic impact is limited. This likely sounds heartless: The crisis is maiming communities, destroying families and killing people.

But stocks are callous, and unless the issue mushrooms into an unseen, multi-trillion (with a tr) dollar problem and a near-term impact, markets can march on in an imperfect world.

Society debates all these issues, which vary in severity, of course. But overall and on average, they become economic problems only if politicians attempt to solve them in a way that carries big economic consequences downstream. For investors, the key thing to watch is how politicians react and what policies they prioritize.

As you sift through the news with your investing cap on, ask questions focused on equity supply and demand. Some examples: How will this story fundamentally alter stock supply? Will it materially affect the global economy's current cycle? Does it impact corporate profits within the next three to 30 months?

And, crucially, what does the general investing public think of these things? This interplay between economic and political fundamentals and investor sentiment is what really matters for stocks -- stripping out a lot of the extraneous noise. And when it comes to forecasting stocks, the more noise you can filter out, the better off your portfolio will likely be.

Fisher Investments is an independent, fee-only investment adviser serving investors globally. To learn more about Fisher Investments, please visit www.fisherinvestments.com.

The content contained in this article represents only the opinions and viewpoints of the author. It should not be regarded as personalized financial advice and no assurances are made the firm will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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