Donald Trump’s long awaited and clearly telegraphed decision to withdraw the US from the Iran nuclear agreement arrived on schedule today. But instead of producing fireworks, markets reacted to the great announcement with a yawn.
An interesting point is that in the morning, before the announcement, markets were off. When word leaked that Trump had already told French President Macron his decision, major indices dropped, and both oil and gold rebounded. Then the expected news came across the wire, and most prices headed back to where they were before.
What’s going on? Doesn’t Mr. Market care that the world could be headed toward a new nuclear outbreak in the Middle East? Too many martinis during that long business lunch?
But we’ve seen this many times before. It’s common before major Fed announcements. Mr. Market often seems to react more strongly to fears of events than the events themselves.
Why?
The answer may lie in the fact that Mr. Market is not an individual. That’s obvious, but like so many obvious things, people forget. “The market wants this” or “The market tells us that”… Such expressions are metaphors, but they can lead the careless to think of markets as individuals. In reality they are composed of millions of individuals, all of whom have different ideas, outlooks, goals, agendas, and more.
Add to this picture the fact that prices are determined on the margins. The result is that a relatively small number of individuals—especially at times when most participants in a market are waiting to see if something important happens—can have a disproportionate impact on prices.
Times when big news is brewing brings out the gamblers among investors.
I won’t call them speculators. The proper use of that term to me is reserved for rational decision-makers who project trends and act when the odds are in their favor.
Guessing that a president may do something unexpected or that a loudly telegraphed policy decision may be put off is gambling. Wearing a fancy suit and playing in markets with large sums of money based on such guesses doesn’t change the fact that it’s gambling.
That’s my theory. What we saw today was a classic case of certain market elements thinking they were cleverer than everyone else. They gambled on getting ahead of the rush that would ensue had Trump backed down. And they lost.
I try to remember this whenever I see prices going wild in front of a major event. Those wild swings are especially subject to sudden reversal. Perhaps the most dramatic example of this was on election night, when Trump became the president-elect of the United States.
Do you remember?
I do. Clearly. As it became more and more evident that Trump would win, gold soared. Then he did win and gave his victory speech—and gold tanked.
Mr. Market seems like a psycho at such times. The reality is that there are actors in the market who decide to make big gambles when big events are afoot. When they get it wrong, crazy things happen.
Beware.
