With the U.S. economy still mired in a huge recession, and the economic recovery in Europe further along, this has some people concluding European stocks should be added.
You would think that people who are paid for their expertise in advising on stocks would at least pay a little more attention. These are folks that, in spite of the fact that it is not the case that the economy and the stock market are even correlated well enough to even want to look at these things, they are still pretending that it is, perfectly correlated even.
They may never learn their lesson, because the only way anyone would think such things is that they haven’t bothered to even check whether their hypotheses are valid or not, they just assume that they are and then bear the pain of being wrong time and again. When it doesn’t matter how off base your assumptions are because they will never be questioned, that does not bode well for your ever figuring out what actually may be going on.
This is just one among a whole bag full of assumptions that are invalid but no one bothers to check, and it doesn’t matter how hard of a blow that reality delivers them, they just stand there and happily take more. It’s hard to imagine a bigger divergence between the U.S. economy and U.S. stocks than the one that we have now, and if you miss this one, you are beyond hope, as we may never see their wrongness screamed at them as loudly as this again.
While we still should be looking at economic data, it would be far better for these people to completely ignore it, as is always the case when you are taking the wrong path. If people were forced to write an essay explaining why we can have the economy in shambles but the stock market strong, this may at least have them thinking about the matter, for the first time no doubt.
We want to give them a little help so a good starting point would be to ask them how any change in the economy affects stock prices, and hopefully they will be able to discover the element of agency here, and come to realize that it is not the economy that moves stock prices but instead it is people, who hear all the things that go on our there, process it, and then come to a decision that is reflected in the markets.
Economic data does play a role in stock prices to be sure, but so do a whole lot of other things. If we pretend that a single influencer among many is the sole influencer, or even the predominant one, and this is simply not the case, we will be misguided.
Among the things that we miss is the fact that some types of stocks may and have been brought down a lot by the current macroeconomic environment, but many may not have been and may have even been helped by all these changes. There are times where these things bring down just about every stock, and other times where the pain may be delivered more selectively, and this is one of the latter.
We’re supposed to make our decisions based upon the preponderance of the movement of stocks known as the market, where if the market isn’t doing well, this is supposed to mean that it’s not a good time to be in stocks, and when the market does something other than we expect, we imply it has acted erroneously merely by not being in harmony with our beliefs, however mistaken.
What stands out the most here is why so many people are so interested in how stocks are doing generally in the first place. As long as there are stocks doing well, that should make us happy enough. If some sectors are in the toilet, that should not even concern us unless either we insist on taking them on and being thrown into the toilet ourselves, or if we wish to profit on their losses by betting against them. There is no in between.
We should actually assign ratings to stocks based upon their near-term potential, like analysts try to do with their buy and hold recommendations, with no regard at all it seems to fidelity. When they are recommending to hold the worst garbage in the market, and a stock like Apple is still seen as a market perform over a time where it is crushing the market, we need a little more accuracy than this, and we also want the ratings to be based upon reality and not some distorted misunderstanding.
We’re going to have to come up with these truer assessments ourselves though. The old George Bernard Shaw maxim of “he who can, does, and he who can’t, teaches” may not be fair to teachers but this does apply to the investment world for sure. This especially applies to those who manage our money because if they were good at this, they wouldn’t have the need to bother with ours.
This is especially true in trading, and as far as the investment world goes, we can extend this and say he who can trades, and he who can’t trade invests, and he who can’t invest, teaches. Trading is where the real money is, and good traders earn many times what good investors do, and good investors make more than those who aren’t any good, who are left to share their lacks with others for a sum of money.
If anyone is looking to become a good investor, they should start by trying to become a good trader. Even if you are a fairly mediocre trader, you will end up being many heads and shoulders above not only the average investor but those who profess to be good investors, because you will at least learn how markets work, where these so-called investing experts are still back in kindergarten playing with blocks.
Learning to Trade Can Be Very Valuable in Learning to Invest
A trader will actually look at what is going on to decide where markets are headed, and what is going on is always portrayed in pictorial form on the charts of stocks. People who study charts are called chartists, and you need to become a good chartist if you are a trader or you won’t be trading long, and you can lose your whole bankroll time and again until you figure out this one thing.
The much higher frequency of trading shows no mercy toward our mistakes. It does not allow you to be so smug as to say things like I don’t care that Amazon has gone up as much as it has since I sold it since I made a nice return anyway, a comment heard on CNBC on Friday from one of their panel of “experts,” as this is a day 1 mistake of a trader and one that if not remedied will take them out of the game very quickly.
You don’t want to beat yourself up for mistakes even this big, but you do need to come away with a lesson. The lady said she started getting too nervous and sold, and that’s exactly the same reason newbie traders do it, and if you can only master a couple of good trading lessons, this will put you well past this woman and her ilk and their blatant newbie mistakes.
This is just one among many good lessons that we can learn from trading that will help us achieve success when investing, and anyone who thinks investing is different from trading other than the fact that traders make more trades does not even know what good investing looks like, because it looks just like good trading but with less trades. It may look like something else entirely, but that’s because in that case it’s just not good investing.
A trader would see the economy decline and then wonder how various stocks are taking this, have a look, see some stocks getting hammered and others continue to move up just as reliably as ever. There is no more wondering required, all we need to do now is to pick from among those doing well on the long side and maybe even pick some ones still bleeding to short.
If people are claiming that European stocks are better, we won’t care whether or not their economy is recovering faster than ours, we’ll look to see how these stocks are actually doing, looking at a chart of the iShares Core MSCI Europe ETF for instance, which is well representative of their claim, to see if what they say is actually true.
This is exactly what we are going to do, and compare it with a good U.S. index like the Nasdaq 100 to see if it is beating it. If it is, we will at least consider it, although we still want to be careful as the Nasdaq has been beating the broader market since it was put together almost 50 years ago, and European stocks have been well behind so we need more to go with than just a little rally over a couple of months, if they even have managed to beat it over this short period.
At first glance, the chart from this year looks more like the Dow than the Nasdaq, but we suspect that the people that are calling for us to add European stocks aren’t comparing Europe with the Nasdaq because they probably suffer from the very widespread and yet unnamed disease that is characterized by the brain being unable to recognize this particular stock index.
This is a curious disease whose cause is unknown and we don’t even know anything about it other than it causes total blindness to this index. Just the day before, another panelist had the very same recommendation, two days and two different talking heads calling for us to jump on Europe, where we were told that Euro stocks were comparing pretty well to U.S. indexes, except for the Nasdaq, so we should get into European stocks.
Unfortunately, we weren’t told why that, if we’re looking for something better than the S&P 500 and the Dow, and Euro stocks have allegedly passed the other two indexes but not the Nasdaq, why we would want this admittedly lesser choice. As we can see, this is a genuine mental disorder, where we commit a heinous mistake in logic that even a young child would be able to see through, but are left completely unaware.
This reads like an IQ test you might use with someone who has suffered a lot of brain damage from a head injury to see how bad the damage was. A is better than B and C but not D, therefore A is the best choice. Jaws should have dropped, but the panel just nodded along.
We’re going to defer to this condition and pretend, like those who suffer from this disorder, that the Nasdaq does not exist, or we can bring it up but not give it any consideration for some reason, and see if these stocks even measure up to the S&P 500. If we can do that, then at least Euro stocks can make sense to those who suffer from this disability, an alternative to this popular U.S. index that folks have so much of their money in.
If We Think European Stocks Are Recovering Faster, We Should At Least Check
We want to go back to the start of 2018 to get a sense of how these two indexes compare over this time, although it’s fairly common knowledge at least that the Americans are going to win this one pretty easily. The S&P 500 is up by 19% over this time, while the MSCI Europe is down by 12%. For the benefit of those who don’t suffer from Nasdaq blindness, we probably should throw in the performance of the Nasdaq 100 as well, which has gained 63% over this time.
Whatever might be going on now, this makes the inferiority of European stocks very clear, but to be fair, the claim is that Europe has done better from the recovery so we’ll do our best to try to find any evidence of this.
We’ll now look at 2020 results, and if Euro stocks are so hot, if their recovery has been so notable that we want to travel across the ocean to find better plays, we would think that they should at least be surpassing the S&P 500’s single percent gain this year so far. The Nasdaq isn’t being counted, but what we’re looking for is a significant difference, perhaps nowhere near as big as the Nasdaq 100 being up 25% this year versus the 1% the S&P 500 is up, but being behind by the 11% year to date that the MSCI Europe is down is pretty far away in the other direction.
Perhaps we need to calculate from the peak before the big coronavirus panic selloff hit us, back on February 19. The S&P 500 might have caught up to their December 31, 2019 price, but this index is still working on getting back up to February 19, and still has 3% more to go. The Nasdaq has surpassed this by 13% so far, and that’s what you call a real recovery, but what about these Euro stocks?
The iShares MSCI Europe ETF is down the same 11% from here as they are for the year, and this is because unlike the U.S. indexes, they did not move forward from the start of the year until this point. We’re not only left with the S&P 500 well ahead on this measure, the fact that it had good momentum prior to this fall speaks to its superiority over something that wasn’t going up before this and is much further behind even that point.
We still want to uncover every possible rock, so we’ll have a closer look at the Euro index to see if we can build any kind of case about this index running hotter even for a little while since. We’ll start with looking back to March 23, when all three of these indexes bottomed. If the Euros can beat the S&P 500 since then, a legitimate claim can be perhaps made that they are recovering better, so let’s have a look.
Let’s start with how much that these indexes gave up during the crash that occurs over this time. The MSCI Europe lost 36%, the S&P 500 gave up 34%, and the Nasdaq 100 dropped by 28%. Once again, the Nasdaq beats both of these other indexes handily, and Euro stocks lag the field once again, although by not that meaningful of an amount.
What’s most notable about these numbers is that this sort of crash is why people are more afraid of the Nasdaq, but like their other beliefs, they have just assumed them to be true and haven’t bothered examining them. The Nasdaq, being a stronger index, does not tend to collapse compared to the S&P 500 and tends to do a little better during these times, as well as all other times as well, but you have to be willing to test your beliefs in the real world to discover that they are based upon myth.
We can’t ever discuss these drawdowns in isolation though and always need to point out that to get any sense of how drawdowns affect performance, you always need to look at how these things play out over time. When you do this, you will see the Nasdaq going up a lot more during the good times and giving up a little less during the bad times, and when we look at net changes to measure risk, as we must, that means it’s less risky, and certainly not more as the mythology surrounding this would have it.
We’ll now turn to how these indexes have done since March 23. Perhaps the Euro will finally show us something, and it will be refreshing to finally come up with a number from this index that does not involve double digit percentage losses.
Sure enough, this index does go up in value sometimes, and is actually up 39% since then. Maybe they are a contender after all, and winning this one may even want to make us forget about how poorly this index does otherwise.
As impressive as this 39% gain might be, this still comes out behind the 46% that the S&P 500 has moved up from this bottom until today. This one measures the recovery directly, and is a direct hit on the idea that European stocks have recovered or are recovering or even can be seen as recovering outside a fairy tale that is. The Nasdaq’s 56% gain since then once again beats both soundly.
Maybe what has been meant by this is that European stocks have recovered more of late. Maybe we need to just look at the last month. The European index is up 3% in July, with the S&P 500 up 6%, and the Nasdaq up 7%. How about just the last week? The Euro index is down 2% this week, while the S&P 500 is up 2% and the Nasdaq is up 4%.
The U.S. stock market is the major leagues as far as stock markets go, with European and other foreign stock markets being down in the minors. While someone in the minors can earn their way onto the big club by being clearly better, all the evidence points to this index of foreign stocks still well deserving their minor league assignment.
We even wonder how in the world anyone could think that European stocks are recovering at a faster rate than the S&P 500, and especially not the Nasdaq, even though we accept that so many people are blind to it. The answer is actually obvious though, that they are comparing the economic recovery of the two regions and then assuming, quite wrongly, that this means that this translates over to the world of stocks as well.
We would think that these folks would at least have the presence of mind to check these things first before they start firing off recommendations. We need to be resigned to the fact that this is indeed too much to ask. Someone needs to do some fact checking though, and this ultimately falls upon ourselves.
Claims that European stocks are outperforming U.S. stocks turns out to be just one more ridiculous claim that is tossed at us, but not being able to even think logically should be enough of a red flag to either just turn away from this advice, or actually look into it beyond its just being proclaimed and perhaps learn a little about just how dogmatic popular investing advice turns out to be.