Seinfeld is one of the greatest TV shows of all time. One of the greatest episodes of that series is “The Opposite”, where George Costanza, realizing that every instinct he has is wrong, decides to do the exact opposite of what he would usually do.
Jerry: If every instinct you have is wrong, then the opposite would have to be right. George: Yes, I will do the opposite! I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!
This results in George getting a girlfriend, a job with the New York Yankees, and moving out of his parents house. It also gave us this classic line when hitting on a girl at the deli.
Investors have probably been feeling like Opposite George this month. Why? First, we’ve had pretty awful economic news, especially in housing. Home prices dropped by the most since the great recession. Home sales and housing starts declined significantly as well.
We’ve also started to see the decline in corporate earnings that many have been predicting due to higher interest rates and a strong dollar. Amazon, Google, Facebook, and Microsoft all missed their earnings estimates this month due to higher costs and reduced sales estimates going forward.
Old George might have thought the market would have tanked on the news. While the individual stocks mentioned above did sell off (Facebook was down 24% after they announced earnings), the market overall was up. The S&P 500 was up over 6% this month as of the time of this writing despite all of the negative news.
Why might this be happening? First, it could just be positioning. As we’ve written before, sometimes stocks snap back after extreme bearish positioning. But the reality is, stocks will often do the opposite of what you’d expect coming out of bear markets. From Michael Batnick:
Overweighting today’s news, for better and for worse, gets investors in trouble because today is already priced in. Stanley Druckenmiller recently relayed this message to an audience, saying: “Do not invest in the present. The present is not what moves stock prices.”
The stock market is forward-looking and has an uncanny ability to bottom while the data continues to sour. It stops going down while GDP, employment, and earnings deteriorate.
This is how you’ll see seemingly incongruous headlines like “Dow Jones gains 900 points while unemployment hits a 24-month high.” The market has better long-term vision than we do, which is one of the trickiest parts of a bear market. Everything in your gut will tell you to sell. It will tell you that things are going to get worse. And it’s probably right. Things will get worse! But the market will have already looked past it.
It’s hard to know if this is the bottom of this bear market cycle or if we’ll retest the lows again. But at some point, likely in the depths of awful economic news, stocks will rally furiously. They will not wait for an “all clear signal”. So the next time you want to sell all of your investments at the onset of bad news, perhaps you can channel Opposite George. It might not get you a job with the Yankees, but it could prevent you from making a bad decision.