Stock Investors Ignore Fire Alarm

Job creation continued to slow in November, as COVID-19 surged throughout the nation. The economy added 245,000 jobs, about half of what was expected. The unemployment rate ticked down to 6.7 percent from 6.9 percent, but for the wrong reason: participation in the labor force dropped again. Since February, more than four million people have left the labor force, a sign that many out of work Americans are giving up their searches or have been forced to the sidelines to care for older relatives and young children, the later is especially true for women workers.

Although the economy has replaced 12 million of the 22 million jobs lost during this recession; that still leaves the U.S. with 9.8 million fewer jobs than there were pre-pandemic. Another worrying aspect to the November report was the increase in the number of long-term unemployed (those jobless for 27 weeks or more) to 3.9 million. This group now accounts for more than a third of the total jobless and ominously, these workers “tend to suffer greater consequences than those who quickly find work,” according to Diane Swonk, Chief Economist at Grant Thornton.

The labor market could deteriorate further in the coming months, as the full impact of municipal restrictions to contain the virus prompts employers to hold off on hiring or reduce current staffing levels. Fear of a slowing recovery prompted the U.S. Chamber of Commerce to warn, “The fire alarm is sounding on our economy.”

Evidently, stock investors didn’t hear the alarm. As the weaker than expected jobs report hit the wires, equities went up. Investors may have liked the disappointing number, says economist Joel Naroff, because “they could argue that it puts more pressure on the government to sustain the business and household welfare programs by passing a new stimulus plan.” 

And so for the second time in a week, the Dow Jones Industrial Average (DJIA) hit the 30,000-level. Yes, “it’s just a number”, but those big, round numbers can act as psychological markers, on both the upside and the downside. The current buoyancy comes just eight months after the Dow bottomed out at 18,213, the index is up more than 60 percent since those gloomy days.

With that said, please put away your rally caps and refocus your energy on your personal goals and objectives. My worry is that with indexes soaring, some of you may be tempted to ratchet up the risk in your portfolios. While election uncertainty is behind us, another round of stimulus may be in the offing, and a vaccine will be available before next summer, it may not be wise to pile into the stock market. In fact, now more than ever, you need a systematic approach to your investing and a better way to make higher quality decisions.

I was reminded of why having a smart process is so important after I interviewed Annie Duke, author of the new book, “How to Decide: Simple Tools for Making Better Choices,” on my podcast. Duke, a former professional poker player and academic, drills down to explain why we make poor decisions and how we can create and adhere to a better system to improve our choices.

According to Duke, we conflate the decision making process and the outcome of the decision, due to a concept called “resulting.” Resulting can lead one to believe that if you get a good result, you made a good decision. We do this because judging outcomes is easier than analyzing the decision making process. I asked Duke to explain resulting using the current backdrop of the pandemic.

She started with a simple premise: Any time you gather with others, especially indoors and unmasked, there is some probability that you could get infected with the virus. If you were to do this a number of times and not get sick, was it a good decision to assume the risk? Absolutely not! “You can make horrible decisions and have a good outcome because the outcome is probabilistic,” says Duke.  In fact, “there are only two things that determine how your life turns out: luck and the quality of your decisions. You have control over only one of those two things.”

Applying the concept to investing, consider this: If you pile into stocks only because markets are reaching new highs or you have a “gut-feeling” that the rally will continue, that’s a bad decision regardless of whether markets keep rising or if they drop. Instead, a robust decision making process would include contemplating various outcomes and weighing how they might impact your overall financial plan.

Duke warns that without a smart process, the outcome of a decision can lead you “to overlook or distort information about the process, making your view of decision quality fit with outcome quality, when you make a decision, you can rarely guarantee a good outcome (or a bad one). Instead, the goal is to try to choose the option that will lead to the most favorable range of outcomes.”