Earlier this month, the latest inflation report came out – no judgement here if you missed that “breaking news.” Inflation cooled slightly in April after rising for the first three months of the year. It wasn’t a huge drop, but it was enough to boost the market by 1% on the day of the announcement.

This caught my attention for two reasons. First, a slowdown in inflation often signals a slowing economy, which isn’t usually great news for the stock market. Secondly, it highlights how unpredictable and fascinating markets can be – identical trends can lead to very different interpretations depending on the economic environment. Let me explain – actually, I’m going to let Rosie Perez explain the philosophical point in this clip from the cult classic “White Men Can’t Jump.”

“Sometimes when you lose, you really win and sometimes when you win, you really lose.” This quote could apply just as easily to Wall Street as it does street basketball and gambling. 

Consider these two scenarios:

1. Weak Economy: Corporate earnings are down, unemployment is up, and inflation is low. A lower-than-expected inflation reading might worry investors, signaling a weakening consumer base and the potential for a recession or bear market.

2. Strong Economy: Corporate earnings are solid, unemployment is stable, but inflation has been above the Fed’s target for a while. In this case, a lower-than-expected inflation reading might be welcomed as a sign that the economy is cooling from an overheated state AND could prompt the Fed to lower interest rates sooner, making borrowing cheaper for consumers and businesses.  

Two different economic situations where a decline in inflation would likely lead to very different market reactions. The key investing lesson here is beautifully captured by the Chinese proverb called “We’ll See,” where bad things sometimes turn out good and vice versa. Investing aside, the “We’ll See” proverb is one of my favorite life mantras and is definitely worth a quick read!

Thinking about the April inflation report, “White Men Can’t Jump,” and the “We’ll See” proverb might seem like is a strange combination, but here are two important takeaways for investors:

1) Short-term Predictions are Tough: To make money on market events, you need to get both the outcome and the market’s reaction right. Here are two memorable times when investors got the outcome and market reaction wrong:

• Brexit 2016: The UK unexpectedly voted to leave the EU. Many experts predicted market decline due to the resulting uncertainty. Instead, markets rallied leading up to the U.S. presidential election.
• 2016 Presidential Election: Polls gave Hillary Clinton a 90% chance of winning the week before the election. Many predicted that a Trump victory would lead to a market decline due to his lack of political experience. Trump won, and markets surged post-election.

2) Sometimes Losing is Better than Winning: 

When it comes to our own investment portfolio, sometimes losing is actually better than winning. We’ve discussed how most stocks stink. As I reflect on my biggest investing mistakes, what if I was successful in picking individual stocks as a young investor? I might have believed I had a talent for it and taken bigger risks (and losses) later. Short-term pain provided me with long-term gain. Those early losses were a valuable lesson in the importance of maintaining a long-term focus and portfolio diversification.

Wrap It Up!

While it’s tempting to chase short-term gains based on immediate economic data, the real lesson lies in understanding that outcomes and market reactions are often unpredictable. Embracing the “We’ll See” mindset can help investors navigate the ups and downs with greater resilience. Remember, sometimes what seems like a loss today can turn into a valuable win in the long run. Stay focused, stay diversified, and keep the bigger picture in mind.

Castle Quote: “You can learn this from us, or the market will teach you, but the market sends out really expensive tuition bills.”  – Dan Wheeler