What a week it was for the market! Up one day, down the next. Back up and then down and then down again! So what gives? Should we be worried?

The latest data indicators painted a gloomy picture. If you assume the severe winter storms, including snow and freezing temperatures across much of the United States, are going to continue through the summer, and if you think no one is going to spend their stimulus checks, then things do look pretty bad. But the weather changes, bringing with it summer’s new perspective, and most recipients of stimulus checks and monthly child benefits are going to spend them. From that perspective, last week looked abnormal at worst. Of course, this assumes you are a human and not a computer.

About 60% of all trades done in the stock market are originated by computers driven by algorithms with no human interaction. Computer algorithms are built to read news, including data points like individual tweets. These machines can read a two- or three-page news release and make a reactive trade in less than a second – far faster than a human being can read that same news.

Spread was a company that raised around $300 million to build a fiber optics line between New York and Chicago. Most fiber optics cables run along right of ways and rail tracks. Data travels at the speed of light. Spread’s fiber optics cable cut 4 milliseconds (there are 1000 milliseconds in a second) off the data travel time between New York and Chicago as compared to the competing network. Stocks are traded in NYC and futures are traded in Chicago. If there was a small difference, the Spread network allowed a computer to trade and take advantage of a few pennies on millions of shares. Spread rented their fiber optics network for $20 to $34 million per year and had no lack of big firm clients.

Computer trading has only grown since Spread launched.

These are all short-term trades but taken together they represent large volumes in buying and selling. Reading news or tweets, the computers kick into gear and begin trading all at once in huge volumes.

On one day the computers read that retail sales were significantly below forecast. They see the economy must be slowing down. The computers don’t factor in the freezing winter storms or the January retail sales revision upward. They read retail sales are down, so they sell.

The computers read that total industrial production decreased 2.2% in February. They do not take into consideration the petroleum refineries, petrochemical facilities, and plastic resin plants shut down because of the deep freeze in February. The computers just see that industrial production was down 2.2% so they sell.

This is now the world in which we live. It is unlikely to change. Volatility is going to be with us indefinitely.

It can be unsettling. The bounces up and down often have little to nothing to do with reality and the longer-term movement of the market. But when the market drops two- or three percent it certainly feels like there must be something wrong.

Warren Buffett used to say that he had no quote machine on his desk. He was in for the longer-term, and it was the longer-term movements in the stocks he held that were his focus. Sometimes I wish I had no quotes on my desk. I am a longer-term fundamental analysis manager, but even so, the volatility sometimes gets to me.

When that happens I have to sit back in my chair, think about why the numbers are coming in as they are. I have to remember that one number does not make a trend. I have to think about why the number is lower than expected. What happened during the time the indicator covered? Will that condition last and endure, or is it a blip on the overall timeline? During the day I can look at the stochastics on my machine and see it is computer sell programs at play. And then when the market closes, I have to shake my head and smile knowing that I am a long-term player and these short blips are not going to change what I am doing.

I would guess that is one reason I hang in and achieve the results I do for my clients.

In my opinion we are still in the secular bull market I have written of over the years. John Templeton said, and I believe it to be true, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

With what has gone on last week, do you really believe we have been in a state of euphoria over the last couple years? If not, then hang on, because we are probably headed higher and it’s going to be a bumpy ride.

A Michael Adams
President & CEO