Consensus has been on top of the markets mind lately, and so. I get up every morning and go to work, as everyone else does. I mostly write about financial news. Therefore, a habit of mine in the morning is to look at all the news outlets to see what has been happening in the markets. Bloomberg is my first choice. The first headline that I’ve seen a lot lately is “_____ up/down, amidst ______. Markets wrap.” It is like a game of alibis, mixed with a bit of game theory. What does the market think it thinks it thinks? The market is like that one friend that always asks for advice, but never actually does anything you tell them to do. As data with regards to retail sales, unemployment, inflation, deficits etc. come out – does the market really care?
A disclaimer: Correlation does not equal causation. Furthermore, you would need a higher sample size to prove whether there something going on here. So let’s just say this experiment is to quantify whether this has been actually going on in the markets.
Firstly, we need to take a couple of data points that have come out during these unprecedented times. For Non-Farm Payroll, the day when oil went negative and April 8th, America had the most confirmed cases.
Non-Farm Payrolls reached a record low of -20.5M in April. However, what did the stock market think? It was down on that Friday. But the week after? It rallied the whole week. Did the market just forget about all the Americans that just lost their jobs?
An unprecedented turn of events as traders were forced to pay buyers to take their contracts off them. The market dipped lower that day. However, the days afterward? A rally for the whole week. You can see this was also around the same time the US peaked in Coronavirus cases.
This is definitely not a thorough test. With the small sample, we can somewhat deduce that the market has some sort of short-term memory loss. In other words, the market reflects newly available information. There is also another rational reason for this – data like NFP and Confirmed Coronavirus cases have analysts covering it 24/7, with consensus as to what the figures are going to be. The market is an anticipatory asset.
I guess instead of asking “how consensus-driven has the market been lately’, it would be better to ask, “how large is the margin of error for consensus estimates lately?” In nonvolatile periods, analysts estimate future data, which becomes consensus. Any deviation from that consensus will affect the price of the asset. However, in times like these, how good can estimations get? Swing traders may enjoy punting on data that goes against consensus. However, for long-term investors, fundamentals should be a more accurate bearing on whether a security price will go up or down. Unfortunately, fundamentals include the current outlook on the Coronavirus on which the outcome is challenging to predict. - (Further reading – Fabozzi and Markowitz – Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies)