“It’s the little details that are vital. Little things make big things happen.” – John Wooden
I love that quote from John Wooden. I would, however, make one addition: all details are not created equal. Some details make a huge difference while others make no difference whatsoever. One of the greatest things about having years of experience in a particular field is that one learns which details matter, and which to ignore.
One great example of this happened in March of 2009. We were at the lows of the market crash, which had been brought on by the Financial Crisis. Then-Fed Chairman Ben Bernanke made a statement that the Fed was not going to allow anymore banks to fail. I remember our next investment committee meeting like it was yesterday. One of our analysts kept saying, “This doesn’t actually change anything, it is just a comment.” She was mistaken; it changed everything.
Bernanke’s comment took zero off the table. When a professional investor analyzes a company, she is looking into the future. No one knows what the future will actually be, so what one does is run various possible scenarios. If one of the scenarios has the business literally folding and the stock going to zero, that will have an enormous impact on what the analyst thinks the stock is worth. This is basic math – when averaging numbers, a zero has an enormous impact. When zero was taken off the table, the projected value of the stock market skyrocketed, and in this case so did the market in real life. The little things make the big things happen.
Just a little while after that, the price of oil flew higher. There were several causes for this, as is always the case. We wishfully try to explain everything that happens in this world with simple cause and effect, but that isn’t reality. When something gets as out-of-whack as oil selling for $140 per barrel, there are multiple reasons. One of those reasons was the Obama administration restricting drilling on government lands. I am not commenting on whether this is good overall policy; reasonable people can have different opinions on that. However, there is no doubt that doing this reduces the supply of available oil and therefore raises the price.
I explained this to one of my friends who agreed with the policy, and he reasoned that even if the administration allowed drilling, it would take a decade before oil was actually found, extracted, and brought to market. All true, but that is not how markets work; markets look at the future. The mere possibility of future sources being available impacts today’s price by more than most would believe. Little things make big things happen, but some details are more important. To the market, the mere idea of oil in the future made a difference, while the detail on timing did not.
We have seen this is reverse when the Biden administration stopped construction on pipelines. These pipelines were not finished and therefore not in operation, but that is a detail that does not matter to markets. The idea that less expensive, more environmentally friendly ways of transporting oil and natural gas were on their way was enough to lower prices. When this was reversed, we have seen firsthand what has happened at the pump.
As we began to exit the first wave of the Pandemic last year, our economy took off. The market saw economic growth, interest rates rose, and the stocks of companies that only do well when everyone is doing well led the way. These are signs that investors believed the economy was off to the races, therefore they demanded a higher return on bonds and saw opportunity in companies that are sensitive to the overall economy.
Yet today, Employment has not come back as expected, economic growth missed expectations by two full percentage points, and inflation has gone up to 5.4 percent and shows no sign of slowing no matter how many times the Fed uses the word transitory. There are lots of economic data details, but there are only two that matter right now: employment and inflation. These are the details that are driving the market today. As long as the employment situation disappoints, we will see interest rates stay low and the stock market favor companies whose business is less sensitive to overall economic activity. As long as inflation continues to rise, we will see investors go into areas that have historically been good inflation hedges, like real estate.
This trend will continue until these details change or the market decides to focus on different details, like the still-solid growth numbers or the potential for hybrid work models destroying the demand for real estate. Little things make the big things happen, but all details are not created equal. Knowing which details matter is the art of investing.
Chuck Osborne, CFA